Sunshine Profits

Last Sunday, Macron won the majority in the French parliamentary election, while Brexit negotiations started the day after. What do these events mean for the gold market?

After the first round, we noted that Macron’s party was projected to win a landslide victory. Indeed, the new president won a commanding majority in the parliamentary election, crushing the opposition.

Although the results were not as high as anticipated two weeks ago, La République en Marche won 350 of the 577 seats in the National Assembly, which means that Macron has all the powers. Republicans kept 137 of the previously held 225 seats, while Socialists who had the majority in the previous election got only 45 seats. The National Front won even fewer seats – only 9, despite the fact that Le Pen advanced to the second round of the presidential election just one month ago.

Macron’s triumph implies that he secured a powerful mandate to push through his pro-business agenda. As a reminder, his plan includes tax cuts and the deregulation of the labor market. These changes could strengthen the country and the whole Eurozone.

Given the importance of France’s economy in the common currency area, Macron’s pro-growth reform could turn on the second engine of the Eurozone’s GDP (now it relies mainly on Germany), which should support the euro.

The appreciation of the euro should be positive for gold, which is often positively correlated with the EUR/USD exchange rate, but some safe-haven bids for the yellow metal would be lost (although the major risks for the Eurozone concentrate in Italy right now).

On the other side of the English channel, Brexit talks finally started last week, almost one year after the historic referendum. Britain agreed to discuss the divorce bill before trade talks. It could accelerate negotiations, but they will still not be easy.

A lot of twists may still happen – and some of them could affect the gold market. On the other hand, smooth talks should gradually reduce uncertainty about Brexit and reduce the safe-haven demand for gold. Anyway, gold remains in a bearish mood after the recent FOMC meeting, which turned out to be more hawkish than expected, and the renewed promises of Trump’s administration and Republicans in Congress to cut taxes. Stay tuned!

Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.