French Election: How to Trade in a Political Market
Geopolitical and political events can unnerve markets. While they are different animals, markets often react in the same way. From a trader’s perspective, the question is how to trade during these times.
What they both have in common is that markets hate uncertainty. This is why the initial reaction to such events is to price in the worst case risk and then reassess as time goes on. This is why headlines tend to have diminishing impact unless, for example, a crisis escalates and markets are forced to reassess the worst case risk.
The war in Ukraine and the Israel-Hamas conflict are examples of geopolitical crises that have dragged on but have become background noise for markets.
This brings up the upcoming political event in France, a snap election where polls show gains by the far right parties. Markets have reacted to the uncertainty by selling off French stocks, widening the German-French 10-yeasr bond spread and selling off the euro.
CAC40 Daily Chart
German-French 10-year bond spread
EURUSD Daily Chart
Chart courtesy of The Amazing Trader
How to trade a political market
I am not a political analyst who can make predictions of what far right led French government policies would be and what impact it might have on the EU. I am only a trader who can give insights into how I trade in a political market.
The key is to identify when the focus is on the political event and when it slips into the background. If you make trades based on how the market traded yesterday (e.g. French political concerns) when the focus is not on it today, you will be fighting the last battle when markets are looking elsewhere.
What complicates this upcoming event is that the first round of French election is less than 2 weeks (plus a second round) from now. This suggests a limit, for example, on the EURUSD upside ahead of it but does not mean it will be the focus every day.
For technical traders, especially day traders, don’t ignore what your charts are saying.
For those who look at other factors as well, keep an eye on French stocks and the German-French bond spreads and see if EURUSD is correlating for clues to market angst.
So just remember that markets factor in the worst and reassess afterward. The French elections could have implications far into the future but for now all it does it create uncertainty in markets that hate uncertainty.
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