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French Election, Macron, and the Powerful Euro

Posted Friday, May 5, 2017 by
Eric Furstenberg • 6 min read

We’re only two days away from the final round of the French presidential election. On Sunday, May 7th, France will decide whether the independent centrist Emmanuel Macron or the far-right Marine Le Pen will be the new French president.

If you’ve been watching the markets, you would have seen the massive moves caused by the first round of the election which was won by Macron. The euro and some other currencies gapped aggressively higher on Monday, 24 April. Big moves were also seen on other instruments like certain equity indices and gold. Of course, gold didn’t benefit from the risk-on situation, but the equity markets did.

Although a Macron victory is largely ‘priced in’ by the markets, the financial world will certainly utter a sigh of relief if he wins. A Macron victory would protect the European Union from a ‘Frexit’ which is good for investor confidence and of course, the euro.

On the other hand, a Le Pen victory would be really bad for the euro and the equity markets. She is against France’s European Union membership and wants to reinstate the French franc. If she wins the election, there will certainly be much market turmoil.

I’m excited about the recent forex volatility, especially because of the consistent moves in one direction. This hasn’t been the case with the EUR/USD, however. Since the 180 pip gap higher on the 24th of April, this pair spent 7 trading days moving sideways before breaking out of its consolidation on the 4th of May. However, many other euro pairs have been trading higher at a rapid pace and have filled trend traders’ pockets. Let’s take a look at a few charts and see how we can benefit from strong trending markets.

Before I continue, we have a range of interesting forex trading strategies which includes a trend trading strategy. You can just click on these links to visit these pages.


EUR/CAD – Aiming for the Stratosphere!

French Election, Macron, 1EUR/CAD Daily Chart

So far, this most recent bullish leg has covered an impressive 1044 pips. Do you notice how smooth this ascent has been so far? Strong trends like this have the potential to make you a lot of money and it’s not difficult to trade them at all.

When you notice such a strong, non-volatile trend like this on a daily chart, it’s often a good idea to fine-tune your entries on lower timeframes like a 4-hour or an hourly chart. Some forex brokers offer other timeframes like 3-hour and 2-hour charts which can also be handy.

The reason I like to use lower timeframes to fine-tune my entries is because I can accurately buy weak retracements as the price pulls back to particular moving averages. Conversely, it allows me to sell weak bounces in a strong downtrend as the price pulls back to some of my favorite moving averages. Let’s look at a 2-hour chart of the EUR/CAD:

French Election, Macron 2EUR/CAD 2-Hour Chart

The 20-EMA (blue moving average) has been an incredible level of dynamic support during the last few weeks. In all of these cases, pullbacks to this moving average offered optimal long entries. With a relatively tight stop loss, you could have snatched some beautiful gains throughout this trend progression.

Just remember that when you take entries off a moving average, you need to give the trade some breathing space as the price can easily overshoot the moving average a bit more than you might be anticipating. Setting your stop loss correctly can be tricky, especially if you’re new to trading and not familiar with the different levels of volatility over different assets. If you’ve had some difficulty with this recently, here is a handy trading tip for you:


Trading Tip of the Week

When you trade a pullback to a certain moving average without specific candlestick confirmation, you can measure the distance from the most recent swing high (or swing low for a short entry) to the moving average and use this as your stop loss distance. This way you’ll set a stop loss which is well-suited to the current market conditions with regards to volatility. What I mean by this is that a stop loss of 30 pips could be suitable for a trade on the USD/CHF, but it might not be good for a trade on the GBP/JPY which is normally much more volatile than the USD/CHF. So by using this method, you will automatically adapt to the volatility of the specific currency pair and place reasonable stop losses which will not be too wide, nor too tight. Here is a chart to illustrate this idea:

French Election, Macron 3GBP/JPY Hourly Chart

In this chart, you can see that using this conservative method of setting a stop loss paid off in this instance. The pullback was a bit more aggressive than expected, but the stop loss was just wide enough to carry the trade through. The price moved substantially higher and profit targets of up to four times the stop loss distance could have been hit.

Now let’s say you prefer a tighter stop loss than the distance between the most recent swing high (or swing low) and the 20-EMA. In that case, you can use 75% of this distance or even 50%.

When you tighten up your stop loss like this, just remember to analyze the volatility of the pair properly to make sure your stop loss isn’t too tight for the trading conditions. You should also use a moving average with which the price action has recently interacted in a way which supports the use of that particular moving average.

Let’s look at some other instruments:


EUR/AUD – The Aussie is Going Down Under

French Election, Macron 4EUR/AUD 2-Hour Chart

In this chart, you can see that the EUR/CAD also made a strong push higher. However, the retracements were much deeper and more aggressive. Conditions like this can make it more difficult to use the trading tip explained above.

The bullish waves in this chart are between 320 and 480 pips in size. That means there’s a lot of space between the retracements to make some money. To utilize these bull runs between the retracements, we can switch to a lower timeframe and see how the price reacts to the 20-EMA (or other moving averages). Let’s look at a 15-minute chart:

French Election, Macron 5EUR/AUD 15-Minute Chart

Here you can see that the retracements to the 20-EMA offered exceptional long entries. Once again, you could have used the distance of the retracements from the most recent swing highs to the 20-EMA for stop loss calculation (like in the ‘trading tip of the week’), with an entry on the 20-EMA. Targets could have been at least the same distance as the stop losses. As you can see in this chart, it would have been easy to achieve massive risk-to-reward ratios on most of these trades.

With such a strong impulse like in the example above, you can also trade breakouts of the most recent swing highs. I’ll go over this technique in another editorial, though.

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To wrap up this week’s editorial, there could be substantial volatility ahead of us as we head into the final round of the French presidential election. A victory by Macron should be positive for the Eurozone and the euro. The market has already priced in a Macron victory to a great extent. Therefore, continued euro strength isn’t a given, but I wouldn’t be surprised if the euro caught a bid on the back of a Macron victory either.

Risk trends have been profiting from the high probability of a Macron victory. Equity markets are elevated, the yen is weak, and gold is in a strong downtrend. Of course, we need to be careful of a Le Pen victory, although that isn’t very probable. If she snatched the victory in some way, it would cause tremendous market turmoil and safe haven assets would benefit immensely. The euro would take a knock and equity markets would be punished. Gold and the Japanese yen would rise as investors would quickly move their money to these safe haven assets.

Going into the weekend, you should be really careful. The result of the French election could easily cause large gaps when the markets open next week. You should be especially careful with euro and Dax positions. I personally don’t have any open positions running over the weekend.

Don’t forget to check out our handy live market updates and morning briefs by our experienced analysts, Skerdian Meta and Arslan Butt. We are constantly putting in maximum effort to provide you with all the tools and information you need in order to beat the markets and build a profitable portfolio.

Happy trading!

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