Article / 26 May 2014 at 4:21 GMT

3 Numbers: ECB forum, European elections, EURUSD & DAX

Blogger / MoreLiver's Daily
Finland
• ECB Forum to discuss monetary policy
• European elections shake up the political powers
• DAX and EURUSD both look toward ECB delivering


Today’s market holidays in UK and US and ultra-thin economic calendar should keep markets quiet. The immediate market drivers will be the European elections and their effects on both national and EU-level policies, and the speeches from the European Central Bank’s (ECB) leaders.
Ukip
Eurosceptic parties across Europe made huge gains in EU elections. Photo: Peter Mcdiarmid/Getty Images News

Eurozone European Central Bank’s Forum on Central Banking

This new annual event runs from Sunday to Tuesday, bringing together government officials, central bank governors, academics and financial market representatives. Roughly 150 people are invited to the event in Portugal. This is the ECB’s first such event, and the idea is to turn this into a regular annual event. The Forum on Central Banking attempts to emulate the success of the Federal Reserve’s annual monetary conference held in Jackson Hole, Wyoming. In practice this means plenty of opportunities to exchange views and possibly to first test ideas verbally on the market participants and academics attending the event.

As the pressure on the ECB to ease monetary policy further has increased, and the central bank has practically guaranteed to do so in June, market expectations have built up and now some sort of action by the ECB is practically required, or the market reaction would be swift. Watch out for a lack of resolve in the central banker’s speeches – if they start downplaying the need for further action, the EURUSD could easily jump higher. Today’s key speakers are Mario Draghi (08:00 GMT), Vitor Constâncio (08:30 GMT) and Benoît Cœuré (11:00 GMT). For more on the event and the ECB’s situation, see Bloomberg’s article and the event’s website.  

European elections: Rise of the “populists”

The European elections are now over, and the eurosceptics have increased in numbers. This label is a bit misleading, as it includes parties like the Front National from France and UKIP from the UK or Germany’s AfD. The European parliament revolves around parliamentary groups, which are best described as being Europe-wide political parties. See this quick overview by the BBC: the two largest groups remain the EPP (28%, 186 seats) and the Socialists (21%, 128 seats). The new “Other” (21%, 90 seats) tripled its number of seats from the previous elections.

As the “Other” is very heterogeneous, all of them will not fit into a single or even three groups – the really crazy ones probably end up going solo anyway. Still, the “Others” stop the incumbent large groups from forming easy majorities on key votes, and could occasionally share the same views on some votes, turning them into a political brake that is hard to negotiate with. There will be talks in Brussels beginning today between the newly elected “Others” to join existing groups – or form their own groups.

The European Council will meet next Wednesday and begin discussing who would be their candidate for the Commission’s presidency. The most probable candidate is Jean-Claude Juncker, as EPP won the elections. The blog Open Europe has a calendar of the key dates of the political process.

The rise of the “Others” will surely rattle national-level politics as well. In UK, which effectively operates on a two-party system, most European parliamentary seats were won by a third party, UKIP. In France, the Front National also was the biggest party in the elections. This could push the mainstream parties to become more “populist” in order to keep some of their support. Already the French prime minister Manuel Valls repeated his call for “less Europe”. It will be an interesting year in Europe, for sure.

EURUSD and DAX

EURUSD last week fell below a support level, and the next one stands around 1.3500, with 1.3700-area acting as a resistance level. The EURUSD could continue creeping lower toward the support level in anticipation of the ECB’s monetary easing at its next week’s meeting. The German stock index DAX is currently testing an important resistance level, the all-time-high of roughly 9800. Note that the DAX has been range-trading all of 2014, and a breakout from that range could lead to an extended move. As the DAX has since March made higher lows, a break higher sounds more probable. EUR shorts and DAX longs could be good positions to have at least until the ECB’s meeting, which have often been disappointments for the markets. The trouble with central banks’ dovish talk is that markets tend to price in possible monetary policy changes before the fact. When it is priced-in, there will not necessarily be follow-through momentum left in the markets.

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Source: Saxo Bank

— Edited by Clare MacCarthy
26 May
fxtime fxtime
I agree with the trade suggestion of your above but wonder if the spread between a 1:1 monetisation of Dax and Eur trade is nearing its max and we may be looking at a trade that is already near its limit? It may well be safer to simply await Draghi and his jawboning/inaction again or use a cheaper option trade?
26 May
Juhani Huopainen Juhani Huopainen
DAX break higher makes the chart look as bullish as it can get, but I'm much less enthusiastic about shorting the EUR - the build-up of expectations ahead of the next week's meeting has been notable, and with great expectations come great disappointments.... Perhaps a bullish option play ahead of the ECB meeting would be a good idea?
26 May
fxtime fxtime
Yeah I agree....mkt bias is too bearish for euro...max pain would be a squeeze against bear positions which would reduce spread between the two indices in monetary terms (1:1)

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