Politics played out on currency markets for the time being

The lukewarm response to Emmanuel Macron's election victory indicates that the direction of currency markets is now determined by economic developments and developments in the interest rate market. No longer is the euro swayed by concerns about the survival of the European Union.  

Macron's victory was simply taken for granted in financial markets. Although the danger that France under Marine Le Pen will leave the euro has finally passed, the main European stock indices closed in negative on Monday. In foreign exchange markets, the European currency rose slightly against the Japanese yen and the Swiss franc, but fell at against the US dollar.

New trend determines currency direction
Much of the lukewarm market reaction is due to traders already taking position in the past few weeks ahead of a Macron win. Shortly after the first round of the French elections on May 22, the euro shot up 2 percent to $1,09. The coin then rose further to 1,10. Just before the decisive election round, which turned the mood again. This has everything to do with the shift of attention from European politics to a more structural trend.

US interest rates rise
After a significant drop between mid-March and mid-April, yields on US 10-year government bonds rose from 2,2 percent to 2,4 percent. A higher interest rate makes it more attractive for parties to hold their capital in dollars. Moreover, it seems that short-term interest rates in the United States will also rise in the near future.

Economic growth of 0,7 percent in the first quarter made little impression, but the underlying developments are very favourable. Unemployment has fallen to the very low level of 4,4 percent and house prices are rising steadily. The profits of the American (listed) business community grew by approximately 10 percent in the first months of the year.

European catching up
Due to the positive economic picture, the threshold for the Federal Reserve (Fed) is to raise short-term interest rates at its next meeting in mid-June. Interest rates in Europe are very low. That will not change in the short term, but there is a good chance that the growth figures for the first quarter will lead to a new round of speculation next week that a European interest rate hike is closer than many parties are currently calculating. Before that happens, the European Central Bank (ECB) must first stop buying bonds and other assets; an incentive that was widely criticized by ECB President Mario Draghi during his visit to the House of Representatives.

Newsflow is noise
In the near future, the news stream will undoubtedly again focus on the British House of Commons elections on 8 June and the German Bundestag elections to be held in September. For the time being, however, the direction of the euro versus dollar is mainly determined by economic and interest developments on both sides of the Atlantic. The most likely scenario is for the exchange rate ratio to move sideways in the coming weeks, with the dollar possibly strengthening ahead of the Fed's next rate decision.

Lawrence Martins

Laurens Maartens is a currency expert at the Dutch Payment and Exchange Company (NBWM). Maartens analyzes current currency developments and also provides lectures and training in the field of currency management.

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