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Making sense of the currency market’s strange reaction to the French election

French President elect Emmanuel Macron and his wife Brigitte Trogneux celebrate on the stage at his victory rally near the Louvre in Paris, France May 7, 2017.
Christian Hartmann | Reuters
French President elect Emmanuel Macron and his wife Brigitte Trogneux celebrate on the stage at his victory rally near the Louvre in Paris, France May 7, 2017.

Emmanuel Macron managed to clinch the French presidential election, eliminating the worry that far-right candidate Marine Le Pen would manage a surprise victory and that France might consequently withdraw from the European Union.

Given the positive turn of events for the European consensus, investors might wonder why the euro is slipping on Monday.

The short answer is that this is a "sell the news" reaction. The EUR/USD opened up on Sunday above the key 1.1000 level on early enthusiasm over the Macron win, but the move quickly faded as traders rushed in to take profits on their trades. After weeks of relentlessly buying the euro, currency traders took the opportunity to lock in their gains — thus pushing the single currency below the 1.0950 mark by morning U.S. trade.

Although Macron's win was highly impressive (he captured the presidency by a greater than 20 percent margin), from a markets perspective, the victory was already well priced in. The real buying opportunity for the single currency was two weeks ago, when the first-round results put Macron on the path to the presidency. By Sunday night, the EUR/USD had already rallied by nearly 3 percent in two weeks and was consequently ripe for some selling.

Unlike with Brexit and the U.S. election, the polls in France proved to be accurate; in fact, if anything, they were conservative with respect to the final outcome. The capital markets therefore received little new information on Sunday, and therefore had little reason to push EUR/USD higher.

The currency pair may consolidate for another day or two, but to zoom out a bit, traders should note that the Macron win has clearly lifted an existential threat from the European Union. Better yet, Macron may create some genuine economic reform in one of Europe's biggest economies.

That's why I don't agree with the many currency traders who are convinced that the EUR/USD will begin a long and painful drift lower to fill the gap from two weeks ago at the 1.0700 level.

The Macron win could stimulate the moribund French economy with a combination of fiscal stimulus and much-needed market reforms. If he is successful, he can offer a valuable alternative to the tired philosophies of far right and far left, both of which are ultimately anti-trade and anti-growth. That will be positive not only for the currency, but for global equities as well, as investors look to Europe as another possible source of growth rather than a perpetual economic invalid.

Technically, the longer a gap is unfilled on the charts, the more bullish it is for the instrument. Therefore, if the EUR/USD can hold support near the 1.0900 level as profit-taking runs its course, the pair could easily rebound to make another run at the key 1.1000 level later in the week.

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Brian Sullivan

Brian Sullivan is co-anchor of CNBC's "Power Lunch" (M-F,1PM-3PM ET), one of the network's longest running programs, as well as the host of the daily investing program "Trading Nation." He is also a frequent guest on MSNBC's "Morning Joe" and other NBC properties.

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