Euro rises to two-week high after France’s far-right wins first-round vote

Euro Hits Two-Week High Amid Uncertainty Following France’s Election

The euro reached a two-week high during Asian trading hours on Monday after the initial round of France’s unexpected snap election positioned the far-right in the lead. However, the final outcome remains unclear, leaving investors bracing for more volatility.

Marine Le Pen’s National Rally (RN) party led the first round, confirming expectations, though analysts noted that the party secured a smaller share of the vote than some polls had projected.

Ongoing Uncertainty

Despite the initial results, uncertainty continues as the final outcome will depend on alliances formed in France’s 577 constituencies for the second round. Negotiations are already in progress ahead of next Sunday’s runoff. One poll suggests the RN might win an absolute majority.

Since President Emmanuel Macron announced the election on June 9, the euro has weakened by 0.8%. On Monday, it climbed to a two-week high of $1.076175, according to LSEG data, and was last up 0.4% at $1.075425.

“I think it’s a slight ‘well, there were no surprises’, so there was a sense of relief there,” said Fiona Cincotta, senior markets analyst at City Index. She noted that Le Pen’s smaller margin than some polls had indicated may have helped the euro rise.

Market Reactions

The unexpected vote has unsettled markets, with both the far-right and the leftwing alliance that came second on Sunday promising significant spending increases. This has alarmed investors given France’s already high budget deficit, which has led the EU to recommend disciplinary actions.

Last week, the premium that bondholders demand to hold French debt over German debt surged to its highest level since 2012, during the euro zone debt crisis. Shares in major lenders such as Societe Generale, BNP Paribas, and Credit Agricole have dropped between 9% and 14%, leading to nearly a 7% decline in the Paris CAC 40 stock index.

Analysts expect little meaningful recovery in France’s bonds. However, European stocks were set for a higher open, with Eurostoxx 50 futures jumping 1.18%, and French OAT bond futures rising 0.22% during Asian hours.

“We struggle to see a material and sustainable snap back,” said Peter Goves, head of developed market debt sovereign research at MFS Investment Management.

Ongoing Volatility

Markets had calmed after the initial turmoil following the election announcement as the RN party moderated some of its more radical plans and pledged to respect the EU’s fiscal rules requiring France to reduce its deficit. However, they took another hit on Friday.

“Markets are especially worried about the fiscal implications of a potential far-right victory on France’s budget deficit and debt dynamics,” said Vasu Menon, managing director of investment strategy at OCBC in Singapore.

Future Uncertainty

With high uncertainty surrounding next week’s final results, markets are expected to remain volatile. Much depends on political deal-making, as candidates advancing to the runoff have until Tuesday evening to decide whether to withdraw or continue.

The leftwing alliance, led by Jean-Luc Melenchon of the France Unbowed party, has indicated it will withdraw candidates who finish third on Sunday from the runoff.

French bonds could recover if credible alliances form to prevent the RN from taking power, according to Kathleen Brooks, research director at trading platform XTB.

Adding to the uncertainty, Sunday’s high turnout suggests France is heading for a record number of three-way runoffs, which are expected to benefit the RN more than two-way contests.

“Markets are looking into another week of really high uncertainty. Probably fear, as it is still possible for RN to gain an absolute majority next week,” said Carsten Brzeski, global head of macro at ING.