France Elects Macron – What Next For The Euro And Gold Prices?

Monday, May 8, 2017

On Sunday French electors chose Emmanuel Macron for the new presidential term. The final vote is still being tallied as this goes to press, but estimates are in the range of 66% for left/centrist Macron, and 34% for nationalist Marine Le Pen.                                                                                                          

Macron Victory – Major Low For Euro?

Macron victory over Le Pen

Although Macron is the youngest French president in history at 39 years old. In general we view the vote as largely supportive of the status-quo, i.e. a continuation of France remaining in the European Union. The “anti-establishment” theme that had been gaining momentum from Brexit through Trump’s election and to Italy’s constitutional referendum defeat in 2016 has at least taken a breather into 2017 for the French election.

Euro Fears To Subside

It thus appears as if Europe will continue to exist as we have known it since the adoption of the euro-common currency in 2002. There will be no further disintegration of the EU for the time being.

This election behind us, markets can now begin to digest more tangible fundamentals as per the strength of the economies present within the EU in relation to the rest of the world. And although specific countries within the EU certainly are more fiscally sound than others (Germany vs. Greece, etc.), it appears that markets have passed the point of maximum pessimism regarding the potential near-term breakup of the entire European super-state.

EU-pessimism hit a peak in late 2016, following Brexit, the Trump rally, and the potential for a Le Pen victory. This latest fear now passed, it is likely that the euro has put in a major multi-year low in value versus competing currencies. The euro being the largest component of the US dollar index, it appears that the dollar has conversely formed a multi-year high. The last high of this magnitude in the dollar occurred in 2001, which coincided with the $255 low for gold.

We now turn to the charts.

Euro/US Dollar

We typically focus on the US Dollar Index, but for this article and with the passing of the French election on Sunday evening, let us instead turn to the specific euro /dollar cross-pair (EUR/USD), which stated otherwise expresses the number of dollars required to purchase one euro.

Above is the terminal final two years of euro weakness. The support zone between 1.045 – 1.055 dollars per euro failed in December, after the dollar surge following Trump’s victory. However, we were alerted very early in January 2017 that something was wrong with the dollar’s surge, as we quickly witnessed the euro re-assert itself again to 1.085 in early February.

In essence, the euro reversed its multi-year breakdown, which constitutes a “false breakdown” in our technical work (red callout).

In technical analysis there is a major difference in weight that must be assigned to a false break signal seen after a short-term market movement, compared to a false break seen after a multi-year decline.

In the case of the EUR/USD cross-pair, the false breakdown seen in December-January below 1.045 has come after an eight-year euro decline. This is the most severe form of false breakdown that can appear in our technical models.

We see confirming evidence that the euro has begun a new advance as the declining (blue) trendline, which held since May 2016, has now been broken decisively on the Sunday night gap higher a week ago. Our short-term target for EUR/USD is 1.135, or five points above the minor resistance zone of 1.085 which held since December 2016.

Longer-Term Ramifications

Again, it is not the initial target of 1.135 EUR/USD which is our primary concern. Such would only represent an advance for the euro to just below the 2015 – 2016 resistance zone (green target callout).

Rather, the most important aspect of the above chart is where it occurs on the long-term perspective. For that, we must back out the above to the 42-year timeframe EUR/USD chart:

[Note: data prior to 2002 is based on the value of the Deutsche mark, the largest component of the euro currency.]

Please note that the entirety of the two-year chart above is contained within the far right highlight circle on the above 42-year chart.

Referring to false breakdowns, the technical adage is: “From false moves come fast moves.” Yet context is key. False moves from short-term trendline breaks represent minor reversals which require consolidation over the subsequent weeks and months. In contrast, false moves at critical multi-year junctures tend to represent major turning points in markets. 

We can see above that the false breakdown in the euro has happened at a cyclical 16-year low on the EUR/USD. The last low of this magnitude occurred in 2000 – 2001, with the euro bottoming circa 0.83. The most recent bottom at 1.035 thus represents a higher low in the euro.

If this was the best the dollar could sustain for the eight-year advance which began in 2008 – the US currency is in trouble. We cannot know why at this juncture, but the reversal in the euro / dollar is signaling something negative brewing for the US currency in the future.

The last euro low of this magnitude marked the beginning of a 10-year advance in gold from $255 per ounce in 2001 to over $1,900 in 2011.

Takeaway On EUR/USD

With France voting for Macron – and by default to remain in the EU – it is likely that fears of a European breakup have seen their worst over the intermediate timeframe. The dollar has received safe-haven status amidst euro fears over the past five years. Dollar strength has put downward pressure on precious metals.

A reversal higher in EUR/USD has begun. The last low in the euro (high in the dollar) of this magnitude marked the relative low in gold at $255 in 2001. Although diverse geopolitical and economic cross-currents will be impacting the gold market over the years to come, the importance of a 16-year cyclical high in the dollar (low in euro) as a backdrop should be at the forefront of long-term precious metals and commodity investors’ minds.


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Christopher Aaron

Christopher Aaron began his career as an intelligence analyst for the CIA and Department of Defense. He served two tours to Afghanistan and Iraq between 2006 - 2009, conducting pattern-of-life mapping for military leaders.

Mapping shares similarities with technical analysis of the financial markets because both involve the interpretation of repeating patterns found in human nature. He is the founder of iGold Advisor, providing research on the precious metals, and iGlobal Analytics, featuring technical analysis of the global capital markets.

Christopher speaks regularly on the cyclical patterns found within the financial markets and on international policy. He has been featured in the New York Times and NPR news amongst other publications.