A break in the political clouds? Euro sweeps to 6-week high after French debate

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Euro strengthens as political concerns ease, nudging down the dollar index
● Bund yields up and gold down as haven demand wanes
European equities are higher, helped by a rebound for energy stocks.
S&P 500 futures point to positive start on Wall Street after new record for Nasdaq
Oil prices recover some ground but remain near four-month lows

The euro is flirting with its highest level of the year as it takes advantage of a softening dollar and easing concerns about the eurozone’s political climate. The currency is up by 0.4 per cent against the dollar, at $1.0782, and it is gaining 0.3 per cent to £0.8719.

The euro had been under pressure in recent weeks as investors worried that the rise of anti-EU parties across the continent called the fate of the currency union project into question.

But after the far right populists failed to make much headway in this month’s Dutch election, investors are now becoming less concerned that the anti-euro Marine Le Pen can win the upcoming French poll for president. A candidates’ debate on Monday night seemed to provide little fresh impetus for Ms Le Pen.

A poll in the immediate aftermath of the debate showed that 29 per cent of potential voters said Mr Macron was most convincing candidate, ahead of Jean-Luc Mélenchon at 20 per cent and well ahead of François Fillon and Marine Le Pen, each at 19 per cent, according to a poll from Elabe for BFM TV.

An earlier poll on Monday, also from Elabe, had shown the centrist candidate overtaking far-right rival Ms Le Pen for the first time in opinion polls on who would win the first round of the elections, with 25.5 per cent saying they would vote for Mr Macron compared to 25 per cent for Ms Le Pen, cementing his status as the frontrunner in next month’s presidential elections.

Commerzbank analysts said in a note:

In the early hours of the morning the euro appreciated because the independent Presidential candidate Emmanuel Macron emerged as the winner from the French Presidential debates. Fears of a surprise victory of the populist candidate Marine Le Pen, who once again demanded a referendum on France’s future in the EU and that France leave the euro, are abating.

Todd Elmer, a currency strategist at Citi, was more cautious on the driver of the euro’s move higher, stating:

It is not clear to what extent this reflects focus on the debate itself, but otherwise news flow has been subdued. Therefore, it appears fair to say that debate has not stood in the way of a higher euro or resilience in risk appetite. As such, the conclusion we reach is that it is unlikely that the debate will mark a significant shift in investor thinking on the election.

The euro’s strength was also bolstered by weakness in the US currency, as the dollar index continued to trade close to a six-week low as the effect of the Federal Reserve’s “dovish hike” continued to take its toll on the US currency.

The dollar index was 0.2 per cent lower in early morning trading in London at 100.03 – only a whisker above a six-week low of 100.2 hit the previous day.

Easing eurozone angst is reducing demand for the perceived haven of German sovereign bonds, with the 10-year yield, which moves opposite to the asset price, up 1 basis point to 0.45 per cent. Equivalent maturity US paper is adding 1bp to 2.48 per cent.

What to watch
UK inflation data is due for release at 09:30 GMT and traders will be interested to see if any signs of building price pressure can support the Brexit-addled pound.

Sterling is little changed against the greenback for the day, adding just 12 pips to $1.2368. UK 10-year gilt yields are steady at 1.24 per cent ahead of UK government public finance data, also set for publication at 09:30 GMT.

Forex
The Japanese currency is 0.2 per cent softer at ¥112.78 per dollar, with the latter continuing for the time being to find support around the ¥112 level.

The Australian dollar is down 0.3 per cent to US$0.7704 after minutes from the Reserve Bank of Australia’s March meeting showed the central bank had become more concerned about the domestic housing market and less optimistic on the prospects for wage growth and inflation.

Paul Dales, chief Australia and New Zealand economist for Capital Economics, said the RBA was beginning to wonder whether inflationary pressures are more subdued than thought. “This is one of the conditions that would be necessary to trigger further rate cuts,” he said.

Equities
Most stock markets are firmer as traders note US index futures pointing to a 0.3 per cent for the S&P 500 when trading gets underway later on Wall Street.

The mooted move to 2,380, would leave the US barometer less than 1 per cent shy of the record high hit at the start of the month. The technology-heavy Nasdaq Composite did manage to close on Monday in virgin territory.

The pan-European Stoxx 600 is up 0.1 per cent as banks and oil companies gain ground, and Germany’s Dax adds 0.3 per cent.

In Tokyo, the Topix index fell 0.2 per cent as markets reopened after a three-day weekend, while a noteworthy performer was Hong Kong’s Hang Seng which climbed 0.3 per cent to its highest mark since August 2015 as analysts noted buying from mainland China.

Commodities
Oil prices are making a tentative recovery after starting the week on the back foot amid persisting concerns about high US crude inventories.

Brent crude, the international benchmark, is up 0.7 per cent to $51.96 a barrel, while West Texas Intermediate, the main US contract, is gaining 0.5 per cent to $48.48.

Gold is breaking with its tendency to gain ground when the dollar index falls, the bullion slipping 0.4 per cent to $1,228 an ounce.

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