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How much higher can the euro go?

Here are the key questions facing investors as the first week of May begins.

How much higher can the euro go?
Emmanuel Macron had an uncomfortable encounter with workers in his hometown of Amiens as he tried to shore up his position as frontrunner in the presidential election run-off with the National Front’s Marine Le Pen. However, financial markets did not blink.

The polls continue to give the centrist candidate a comfortable lead over his far-right rival ahead of the second round of voting on May 7, and investors have been unwilling to wait for the final outcome before casting judgment.

The euro has risen 2 per cent against the dollar since the first round of voting, helped on Friday by stronger inflation figures. Inflows to European stock funds are rising and France’s CAC 40 index is close to a nine-year high.

Investors did not really expect last week’s European Central Bank meeting to point the way to post-election pullback on its stimulus, but that has not dulled expectations that the monetary easing handbrake will be applied this year.

Political risks will subside, says Valentin Marinov of Crédit Agricole, allowing currency investors “to focus on the improving eurozone fundamentals and the growing prospects of ECB QE taper”. The euro may overshoot to the upside, he adds.

Will the US hard economic data improve?
While consumer and business confidence has soared since Donald Trump’s election, economic data suggests the economy is merely trundling along at a roughly 2 per cent growth rate. Indeed, numbers for the first quarter released on Friday showed growth slowed to 0.7 per cent. The gap between the hard and soft data has become an issue for investors wondering whether to chase a reflation trade that has taken US stocks to record levels.

The release on Friday of the jobs report for April will either go some way to allaying the anxieties or fuel worries the economy is slowing. The report is expected to show 193,000 jobs were added in April, up from 98,000 in March and above the average of the past six months.

Will the pace of corporate debt sales slow?
Companies could be forgiven if they began the year worried by the prospect of higher bond yields, as well as the political risk of European elections, notably in France. Given the risks that dominated at the start of the year, companies front-loaded debt sales and analysts are flagging that the pace will slow as we head into mid-2017.

Analysts at Bank of America Merrill Lynch expect high grade US debt sales of $110bn and $70bn for May and June, respectively, adding that this is “significantly below the totals for the same months last year’’ and “the most tangible reason for this slowdown is M&A funding. Also supply volumes this year have been heavily front loaded.’’