Focus on Central Banks as Political Risk Fades

As the dust continues to settle on the French election result, it seems calm has returned to financial markets with Monday’s brief relief rally coming to an abrupt halt before attention shifted straight back to the upcoming movements from central banks.

Odds on June Fed rate hike hits 88% as USD rebounds

With the eurozone political distraction now seemingly being put to one side, it would appear that traders are once again focused on the upcoming central bank meetings with June being seen as a big month for both the Fed and the ECB. The US dollar is rising for a second day today, having fallen to its lowest level since November prior to this. Traders appear increasingly confident about the prospect of a second rate hike this year in June, with a third this year is also around 59% priced in, according to implied odds based on Fed Funds futures.

Source – CME Group FedWatch Tool

European yields rise on anticipation of ECB tightening message next month

It seems that the passing of the French election has also switched the conversation back to the ECB, with traders anticipating that the central bank will put in place for further reductions in bond buying and possible rate increases by the end of the year. We could get some hint of this in June and with 10-year yields on the rise in European bond markets again today, we may already be starting to see this being priced in.

CAC Unchanged, Markets Eye French Budget Deficit

Having rallied into the French second round result, EURUSD is trading in the red for a second day after failing to hold above 1.10 – an important resistance level for the pair. With the pair having broken below 1.09 today, further downside could be on the cards, with 1.0850 being an important level below.

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Commodity bounce aids equities rise but Gold remains under pressure

Equity markets are being supported today, partly by improved risk appetite but more broadly by the bounce in commodity markets. Oil is trading slightly higher today having pared substantial losses over the last couple of days. Still, it continues to hold below a prior support zone, with $50 in Brent and $47 in WTI now being notable levels to the upside.

Markets Revert to Normalized Risk Tolerance

Gold on the other hand continues to trade in the red today, with stronger dollar, improved risk sentiment and reduction in political risk all weighing on the yellow metal. There’s been a notable inverse correlation with the euro over the last few weeks, highlighting the link between political risk and its safe haven appeal but with the election now behind us, that link may start to weaken. With the dollar showing positive signs, Gold may remain under pressure, with $1,220 below being the next notable support level.

For a look at all of today’s economic events, check out our economic calendar.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Craig Erlam

Craig Erlam

Senior Currency Analyst at OANDA
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the Wall Street Journal and The Telegraph, and he also appears regularly as a guest commentator on networks including Sky News, Bloomberg, CNBC and BBC. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.