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27.05.201909:15 Forex Analysis & Reviews: EUR / USD. The balance of power is changing, but the euro remains calm in the European Parliament

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The euro-dollar pair started the trading week quite vigorously: during the Asian session, the price continued the trend of Friday, retaining its position within the 12th figure. This trend is primarily due to the weakness of the US currency, since the single currency is still subject to pressure from political and macroeconomic factors. The preliminary results of the elections to the European Parliament allows us to talk about the strengthening of anti-European sentiment in the EU countries, against the background of a slowdown in the main economic indicators of the eurozone. Therefore, the further dynamics of the correctional growth of EUR / USD depends only on the behavior of the dollar, in conditions of the day off in the United States and Britain (Americans celebrate Memorial Day, and the British celebrate the Spring Holiday).

Exchange Rates 27.05.2019 analysis

Today, the economic calendar is almost empty: traders can only be interested in a speech by ECB board member Benoit Coeure. But over the past two weeks, he has repeatedly voiced his position on the prospects for monetary policy. Coeure avoids specific wording about the definition of the approximate timing of the rate increase by the regulator and opposes the creation of a multi-level deposit rate, which frees banks from the ECB part of their free cash flow. In other words, he does not see the need to mitigate the effect of negative rates, but at the same time, he is in no hurry to reassure the markets with a "hawkish" attitude. With a high degree of probability, Coeure will repeat this rhetoric today.

Given today's information vacuum, all traders' attention will be focused on the results of the four-day elections to the European Parliament. And although there are no final (official) results yet, it is already possible to talk about certain trends and prospects. The main news is that the two main political forces of the European Parliament lost the majority for the first time, while maintaining leadership in the plebiscite. Representatives of the European People's Party and the Progressive Alliance of Socialists suffered the greatest losses, while Eurosceptics significantly increased their presence in the EU legislature.

In the last convocation, the conservatives and socialists, in alliance with each other, could form a majority, adding on their votes (217 + 187 with the necessary 376). But in the current convocation of the European Parliament, the balance of forces has changed, and now the political forces need to look for a new format of cooperation. Thus, the European People's Party has missed 39 mandates and will now be represented in parliament by only 178 deputies, while the number of socialists will decrease from 187 to 152. Simple mathematical calculations suggest that the alliance of these political forces is gaining 330 votes, while the majority threshold is 376 (until the British left the European Parliament for obvious reasons).

All this testifies to the fact that the "traditional" pro-European forces, which determined the policy of the European Union over the past five years, now need to look for support "on the side", namely among other political forces that passed to the parliament. In particular, we are talking about centrists - the Alliance of Liberals and Democrats for Europe (ALDE), which, in alliance with the Republic on the March party (French President Emmanuel Macron), form a faction of 108 members. Taking into account the fact that ALDEs can become owners of a "golden share" (i.e. thanks to them, the two main political forces will form a majority in the European Parliament). They will qualify for key posts in the EU leadership. For example, Margrethe Vestager is now a candidate for the post of head of the European Commission. Generally, During their election campaign, the centrists promised to intensify the fight against climate change, ensure "fairer" taxation, complete the creation of a single internal market, and contribute to the resolution of the migration crisis. In other words, a standard set of slogans for centrist political power.

Some experts suggest that the EPP and the socialists will create a coalition alliance with the Greens, which also increased their presence in the European Parliament to 67 people. However, this scenario is not yet basic and is considered by most analysts as a "plan B".

Exchange Rates 27.05.2019 analysis

As for the anti-European political forces, they really strengthened their positions: in the current parliament, they will receive more than a hundred mandates. The conditional "Euro-sceptics union" will consist mainly of representatives from Italy, France and Britain (in particular, we are talking about representatives of the Italian 5-star movement and the Brexit Party, Nigel Farage). Eurosceptics have achieved high results in Italy and France, but in Europe as a whole, the outcome of the vote for them turned out to be lower than expected. In total, right-wing parties will receive about 150 mandates, but they will be divided into three different factions. In other words, anti-European political forces will not be able to determine the agenda in the European Parliament - firstly because of an insufficient number of votes, and secondly, because of the fragmentation of interests (for example, "The Brexit Party" has few points of contact with the Italian "5 stars"). The results of elections in some European countries suggest that right and Eurosceptics may come to power in the next national elections in these countries (in the case of Italy, this has already happened), but in the context of the foreign exchange market, this circumstance is unlikely to worry traders, given the remoteness these perspectives.

Thus, the elections to the European Parliament did not knock down the position of the single currency, and also did not strengthen it. The result was largely predictable and therefore did not become a "revelation" for the market. Over the next week, politicians will divide portfolios, distributing key positions. Thus, the name of the most likely candidate for the post of ECB will soon be known (Mario Draghi will leave office at the end of autumn). And at this stage, a more volatile EUR / USD reaction to political battles is possible. In the meantime, the euro will continue to follow the dollar, whose positions depend on the prospects for the US-China trade conflict.

Irina Manzenko
Analytical expert of InstaForex
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