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Limited room for further euro gains as France votes

Here’s what we are watching at FT markets as a new week begins.

Does the euro have limited room to rise as France votes?
With voting under way for the first round of the presidential election, the euro and measures of implied volatility have recovered ground. The euro touched a three-week high against the dollar last week. Notably, the euro has found it harder to rally against the yen, but market sentiment at the end of last week reflected expectations of Emmanuel Macron affirming his frontrunner status ahead of the second round of voting in May.

Investor positioning also suggests expectations of a weaker showing by Marine Le Pen, the leader of the National Front and/or Jean-Luc Mélenchon, the far-left veteran.

Such an outcome, however, may not spur a dramatic rise in the value of the euro.

Analysts at Crédit Agricole note: ‘’Broadly stable speculative positioning suggests that investors have not been regarding the French election as a risk event so far.’’ They add, ‘’ . . . our base-case scenario is unlikely to trigger considerable EUR upside, particularly since European Central Bank monetary policy expectations remain capped and investors’ focus may shift to other sources of risk, such as conditions in Italy.

Has pressure on the ECB to upgrade its economic outlook eased?
After the markets have absorbed the outcome of the first round of the French election, attention will turn by the middle of the week to the European Central Bank, which meets on Thursday.

It will be the first meeting since the ECB scaled down its asset purchase programme by €20bn a month to €60bn a month, a step its president Mario Draghi is likely to be face questions on.

The reduced quantitative easing programme is set to continue until the end of the year.

Eurozone inflation tipped above the ECB’s 2 per cent target in February for the first time in four years, a shift that put pressure on Mr Draghi to retreat from the bank’s dovish stance, but has since dropped back down sharply to 1.5 per cent in March.

The ECB president moved earlier this month to quash speculation that the bank could raise its deposit rate back into positive territory before it ends QE. The sequencing has been hotly contested, but Mr Draghi shot down the notion of an early exit.

Last month Mr Draghi said he was looking for a more rapid rate of increase in workers’ pay before he could conclude that the rise in inflation was “self-sustaining”.

Although survey data has recently been positive, analysts at Investec said the ECB “appears to be in watch-and-wait mode on inflation”, noting that core inflation “continues to linger” below 1 per cent.

Analysts at Goldman Sachs expect the ECB to “continue to see risks to growth as tilted to the downside”.

What will tech sector earnings tell investors about the US stock valuations?
Several technology bellwethers will take the spotlight this week as investors look to see whether the industry can follow the generally upbeat start to earnings season posted by US banks.

Tech companies account for 22 per cent of S&P 500 market value, by far the highest of the 11 major sectors on the benchmark index, FactSet data show. The group has led US stocks higher this year, with gains of 12 per cent, which is more than double that of the S&P 500, although it has stalled since the end of last month.

Analysts are bullish on tech: the blended forecast for earnings growth in first quarter that includes expected and reported results sits at 13.7 per cent, up from 10 per cent in the final three months of 2016.

IBM, the more than century-old company that is in the process of turning its business round, represents a case study in Wall Street’s wrath if results disappoint, however.

Big Blue last week faced its worst day in almost a year after it recorded a steeper than expected fall in quarterly sales and worried some analysts with a slip in profit margin.

Alphabet and Microsoft, which each command market values of greater than half-a-trillion dollars, are set to report on Thursday, along with chipmaker Intel. Apple, the world’s biggest company by market cap, and social media heavyweight Facebook are on deck the following week.

How much of a hit will the FTSE 100 take from a stronger pound? Will falling blue-chips make mid-cap valuations look more attractive?
It’s one of the clearest trading patterns of the year: London’s FTSE 100 has an inverse relationship with the strength of sterling. As investors approach the UK’s June 8 election, there is a growing consensus that the pound is poised to break higher into a new trading range.

UK mid-cap stocks have performed better when the FTSE 100 has faltered, at least in part because valuations on the FTSE 250 can appear more appealing when there are growing fears that the top-tier index looks to have run up too high.

Analysis from Liberum concludes that a Conservative win on June 8 “could provide the government with a strong mandate to execute a smoother and softer Brexit — Consequently this would be positive for UK domestics which could find themselves in favour again.”

Will that pattern hold during the campaign ahead and beyond?

Reporting by Roger Blitz, Kate Allen, Michael Hunter and Adam Samson