After last weekend's election in France, where the incumbent Sarkozy finished poorly, many were expecting the euro to weaken versus the US dollar. Such was not the case, and to the chagrin of a market loaded with shorts, the euro worked higher. Uncertainty, something markets loathe, remains, as we work our way to the final May 6th date for the run-off election between Sarkozy, and the socialist Hollande.
Experts agree the coming election will be close, and most of the polls project Hollande to be the winner. A differing view was offered by veteran journalist Arnaud de Borchgrave, who said: " French President Nicolas Sarkozy will "squeak through" his upcoming election and remain in office, but a Sarkozy loss would lead to a decline of the European Union that could render it "irrelevant."
De Borchgrave also says a major issue in the French election is the war in Afghanistan, which is unpopular in France as it is in the United States. And he warns that the European Union will "automatically collapse" if the Euro currency doesn't survive, yet governments will be "automatically overthrown" by the people if they go too far in reducing spending."
There will be a two-hour debate May 2nd, which may be quite important for Sarkozy. He is reputed to be a superior debater so this may decide the election outcome.
Some of the euro strength may be the result of poor US economic data. On Wednesday, the volatile Core Durable Goods Orders came in at a negative 1.1% less than last month's positive 1.9%. On Thursday, the first time Unemployment Claims went up to 388K. The unemployment numbers, rumored to be manipulated to present the administration in a more favorable light, have been increasing now for weeks.
In the US today, we received the Advance GDP q/q report, which showed the economy grew by only 2.2% annualized. This is less than the previous quarter's 3.0%, and a disappointment for the economy bulls.
Looking forward to next week, the forex markets will be interesting. The prelude to the French election will be important. Should it appear German Chancellor Merkel is about to lose her last austerity advocate, will the euro again dismiss this threat? We also have a European Central Bank Press Conference. With over half of Europe slipping into a recession, dare Draghi reduce the minimum bank rate?
On Friday, we get the latest US unemployment rate, estimated to remain unchanged at 8.2%. This will be followed by the Non-Farm Employment Change Report. The early estimate is for an increase of 176K jobs, but recent estimates have been falling short of expectations.
The market, next week, will probably be a trading affair, with ample volatility responding to the bullish and bearish cross currents.
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