One of the most notable rallies in the recent trading days happened on the euro pairs. The EURUSD and EURJPY bounced from their recent lows, and even the EURGBP ended the previous week higher.
The reason for the bid behind the euro is the increase in the vaccination effort as the number of people getting the jab throughout Europe rose drastically at the start of the new quarter. As such, the European Commission’s target of vaccinating over 70% of the adult population by September looks like a plausible target.
But Europe is at risk of another crisis next year. The French Presidential elections are due, and Macron faces a tough rival in Le Pen.
Four years ago, Macron’s election triggered the biggest jump in French spreads in the previous ten years. Pollsters credit Le Pen with 47% chances of becoming the next French president, so the race will be a tight one.
Franco-German Pillars Key to Euro’s Stability
The COVID-19 pandemic tested the stability of the European Union once again. The fiasco of buying and delivering vaccines to the population negatively affected the European Commission’s image. As such, the trust in the union and the euro declined accordingly.
However, if the vaccination campaign continues at current levels, the euro should remain well supported on dips. The market already shares the optimism, as the European 5y5y inflation swap has reached the highest level since December 2018. Moreover, equities in Europe outperformed the U.S. peers so far in the trading year.
The danger is that by the time the pandemic ends, the French elections will turn investors away from the euro. When Macron won in 2017, the euro pairs gapped higher at the opening, in a positive sign for Europe. If the race remains as tight as the polls suggest right now, long-term investors may choose to divert their funds from the euro as the Franco-German pillar of stability is threatened.
Financial markets celebrated Donald Trump’s departure, but Europe might just be a year away from having its own Trump inside the union. Weakened by Britain’s departure and the COVID-19 pandemic, the European Union may come under severe pressure should Macron lose.
And so might its common currency, the euro.