This is Part 8 of an 8-part series of short articles by EWI's Head of Global Research, Murray Gunn. Murray is based in London, where he documents European hot-button issues in great detail. Murray also views the world and forms his conclusions from a social-mood perspective. It's an eye-witness series you don't want to miss.

Read Part 7 here.

A Decisive Moment for Europe: Part 8

Bonjour! This is Your Euro Wake-Up Call!

by Murray Gunn
Updated: May 24, 2019

Will the European election jolt the currency market back to life?

There's something very reverent about voting. It's easy to take having a vote for granted when you live in so-called developed democracies, but I always try and remember the people around the world who do not enjoy such a basic human right. When I voted yesterday evening, I watched people come and go, all with a smiling sense of purpose. Democracy in action warms the soul.

Having said that, reports today of E.U. citizens living in the U.K. being denied their right to vote because of clerical errors leaves a bitter taste - just when you thought Britain's relationship with the E.U. could not get any worse!

The ballot paper in my constituency had the usual list of major parties, as well as the new Brexit Party which is expected to disrupt the U.K. results. There were no exit polls allowed in the U.K. but in the Netherlands, also voting yesterday, exit polls pointed to center-ground parties doing well. Irish and Czech voters had their say today with the rest of the E.U. on Sunday. Official results are expected to be announced on Sunday evening. Heading into the election, there has been a sense that the anti-E.U., populist vote will do well. However, the official polling has not particularly shown massive gains for such parties, so that still leaves the door open for the "surprise" result on Sunday to be one in which populism gains.

Therefore, foreign exchange traders in New Zealand will be bracing themselves for potential volatility when trading starts again on Monday morning. In recent months, there have been a few occasions when FX markets have experienced a liquidity vacuum in the early Asia-Pacific time-zone, something that has concerned authorities. In the case of the Euro, there may be an increased chance of a jolt occurring because the market in the EUR-USD exchange rate is as dead as a dodo. Add in a U.K. and U.S. market holiday, and Monday's looking particularly nauseating for anyone required to make prices in EUR-USD.

Implied volatility in EUR-USD is at the lowest level since 2014 as is daily Bollinger Band Width. Weekly Bollinger Band Width is just emerging from hitting its lowest level since 1977 in March. The price of the largest and most liquid foreign exchange cross has not been this compressed in over 40 years and, when such compression occurs, it usually precedes a strong trend. At this juncture, our Elliott wave analysis suggests that, providing 1.1263 holds as resistance, such a trend will be down. From a socionomic point of view, then, it could be concluded that the forecasted downtrend in the Euro means that Sunday's result may be taken negatively for the Euro. And that probably means larger gains than expected for the anti-E.U. populists.

So grab your bratwurst, your biscotti and your Beaujolais, and settle in for an evening of political drama on Sunday -- one which future historians may well see as a pivotal moment in the story of the European Union.