It was an historic day in France on Sunday as Emmanuel Macron claimed victory in the French presidential elections.
The Frexit goblin (the fear of France leaving the European Union) remains locked up as voters rejected the populist surge that resulted in Brexit (the UK leaving the EU) and carried Donald Trump to the White House. As a result, we expect the European markets to perform well given that the political risks have dissipated.
But Macron will have to deliver higher growth and lower unemployment. That will be the focal point as all eyes turn towards the June parliamentary elections.
We have a non-traditional candidate in office, so the challenges he is facing are enormous as he tries to work with other parties. Macron needs a strong hand in the parliament which will help him to make swift movements. The unemployment rate in the country remains stuck at 10 percent, greater than that of the UK and Germany, so it clear that the country needs critical reform.
Reaction in the Forex market
This was a perfect textbook trade. We saw a little upward move for the currency but then it reversed direction. A lot of upward movement was already baked in. Nonetheless, the downward risks have diminished in the longer term and we could see the euro/U.S. dollar price moving to between 1.12 and 1.14 as the European Central Bank will have one less thing to worry about.
We could continue to move higher but this momentum is more likely to change into consolidation. At this consolidation stage, we would need a bigger and stronger catalyst to move the euro-dollar pair out of that consolidation movement.
Traders are going to trade the economic data given that the political concerns are behind us. The upcoming German factory orders number will be important and if we beat the forecast, the euro could find some momentum which could help the currency move higher.
Debt market reaction
We are also expecting the French and German sovereign spread to tighten up. The French people have made the right choice, which has eased many concerns and given investors more confidence in holding riskier assets. We must thank the French people and the polls, which finally got it right, for the great result.
Focus back on the central bank
Given that the threats of the French elections are over, investors are going to refocus on the European Central Bank's money printing machine, the stimulus which pulled the euro zone out of double-dip recession, and the bank's plans to slow this machine right down.
What is ahead for the new French president?
It was a bitter campaign and the Frexit threat could surface again, even before Macron's five-year term expires. If he fails to establish a strong relationship with Brussels, then the president will be under pressure. The opposition party's leader, Marine Le Pen, will gather momentum over the coming years and could come back much stronger in five years' time.
On the bright side, the French economic data of late has been showing that the ECB's quantitative-easing policy, where it has bought public and private debt, is producing its fruit. Consumer confidence is strong and the GDP data are not falling off the cliff.
Nonetheless, economic reforms are essential and Macron will have to make it happen in order to bring the divided country together and lower the unemployment rate.
Commentary by Naeem Aslam, chief market analyst at ThinkMarkets. Follow him on Twitter @NAEEMASLAM23.
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