The widely expected victory of Francois Hollande in the just concluded French presidential election is going to pose a fresh challenge to the German-dominated policy of economic austerity in the euro zone. Here is from AP:

“Socialist Francois Hollande defeated conservative incumbent Nicolas Sarkozy on Sunday to become France’s next president, heralding a change in how Europe tackles its debt crisis and how France flexes its military and diplomatic muscle around the world.”

In his victory speech Hollande said, “Austerity can no longer be inevitable!” This does not bode well for the previous Merkozy alliance and for the Euro.

Just as Sarkozy was conceding victory to Holllande, the global markets were opening with a big gap down for EUR/USD. The pair opened the week  at 1.3011 – 71 PIP below Friday’s close. But even before the French result became a certainty the pair was delicately balanced.

Here is a weekly snap shot of EUR/USD on 07-May-12:

After reaching the four year low of 1.1877 in the week of June 7th 2010, EUR/USD bounced back to 1.4940 in the week of May 2nd, 2011. Then it retraced to 1.2624 in the first week of 2012 – a retracement between 70.7% to 78.6% of the up move from 2010 to 2011. Then it bounced back up to 38.2% of this drop.

Since the beginning of this year, the pair has already tested the support zone of 1.2900 to 1.3000 three times forming a descending triangle.

April’s disappointing Non-Farm Payroll data and this weekend’s Hollande’s victory has brought it again to this support level. Now if the pair closes convincingly below this level then the next support is at the January low of 1.2624, which was tested in September 2010 too. If that support also breaks then the next stop will be the low of June 2010 of 1.1870. However, if the support zone of 1.2970-1.3000 is held this week then it may make an upmove finding a resistance around 1.3480.

Going by what is happening in the Euro zone it probably is better bet that the downward trend in EUR/USD will persist till it tests the next support zone. However, unlike the BOE, the Fedreal Reserve has not given up on the QE, which means that EUR/USD could also go up.