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French Election Uncertainty Rattles the Euro

French Election Uncertainty Rattles the Euro

Nick Cawley, Senior Strategist

Talking Points

- The single currency is under renewed selling pressure as the latest polls point to a tight four-way, first-round election battle.

- Safe haven government bonds find willing buyers despite negative yields.

- See the DailyFX Economic Calendar and see what live coverage for key event risk impacting FX markets is scheduled for next week on the DailyFX Webinar Calendar.

The financial markets are starting to price-in the possibility that the first round of the French General Election, held on Sunday April 23rd, may provide an upset, and the EUR is on edge. The two expected winners of the first round, centrist Emmanuel Macron and Far-Right leader Marine Le Pen, have been joined by ex-Prime Minister Francois Fillon and Far-Left candidate Jean-Luc Melenchon.

And it is the emergence of the last candidate Melenchon that is currently roiling the single currency and prompting a flight to safety.

The latest Ifop poll shows Macron retain his slim lead with 23% of the vote, followed by Le Pen with 22% and Melenchon with 19.5%. The poll also highlighted a near 30% abstention rate in the first round which could change the outcome dramatically if these voters decided to go to the booths. And the real, if currently unlikely, worry is a run-off in the second round of voting, on May 7th, between the Far-Right and the Far-Left which could cause a major split in one of Europe’s traditional mainstays.

The Far-Right’s Le Pen has already been very clear on where her party stands on Europe. Le Pen has clearly stated that unless the EU radically changes France’s membership, that she will call an EU membership referendum within six months of the final vote. Any chance of France leaving the EU would cause the EUR to fall sharply.

On the other side of the political spectrum, the Far-Left’s Melenchon, a long-standing EU critic, has said that if successful that he would leave the single-bloc unless there was a radical change of various European treaties. He also said that that if France remained in the EU, he would leave the EU’s stability pact and that he would erase French government debt, a situation likely to send the EUR spinning lower.

The latest polls have pushed the EURUSD pair lower, giving back all of March’s gains, and heading back towards the crucial 1.0500 level which guards the lows seen in January.

Want to know retail traders’ latest view on the EUR, find out here

Chart EURUSD Daily Time-Frame (December 2016 – April 18, 2017)

Chart by IG

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The pressure being felt on the single currency is also being reflected in the fixed income market, with safe-haven German Bunds attracting buyers, despite the negative yields on offer. The government bond curve is negative all the way out to just under nine years as investors continue to pay for the privilege of holding German government debt. German 2-year bonds currently trade with a yield of -0.865% while 10-year German benchmark’s yield a paltry 0.175%.

--- Written by Nick Cawley, Analyst

To contact Nick, email him at Nicholas.cawley@ig.com

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