Euro bulls have cheered the results from the first round of the French elections. Emmanuel Macron and Marine Le Pen have advanced to the run-off vote on Sunday 7th May. Macron is likely to win the second round, which delights markets since he is the pro-EU candidate.
What is this election all about?
There were 11 candidates standing in the first round of voting, though only five of them were seen as serious contenders. Macron and Le Pen were always the front-runners, although Jean-Luc Melenchon had been surging in the polls since March.
Emmanuel Macron is seen as a centrist, who is pro-business and pro the European Union. Marine Le Pen is seen as representing the right, and ran on a platform calling for France to exit the Eurozone and close its borders. Jean-Luc Melenchon, from the Left Party, is both anti-business and anti the Eurozone.
As far as the market is concerned, if either Le Pen or Melenchon won the presidency it would be a disaster for the Eurozone and the euro.
So why is the euro stronger if Marine Le Pen made it to the second round?
The assumption is that the majority of voters who supported the other nine candidates will now vote for Macron. Francois Fillon, who is also to the right, won 19% of the vote and it’s assumed his supporters will be split between Macron and Le Pen. However, Melenchon and Benoit Hamon who came fourth and fifth with 19% and 6% respectively, were both positioned on the left and it’s assumed that their supporters will now vote for Macron.
Betting sites have a Macron victory at 1/8, which gives him an 85% chance of victory.
How certain is Macron to win?
The markets clearly believe it’s inevitable that Emanuel Macron will win. But it isn’t completely certain. If Jean-Luc Melenchon’s supporters decide that leaving the Eurozone is more important than following their political ideology they may support Le Pen. Given the surprises in the US election and the UK referendum last year, it’s not out of the question that there may be a surprise on the 7th of May, especially following La Pen's announcement on Monday night that she was temporarily stepping down as head of France's Front National party in a bid to widen her appeal ahead the presidential election run-off.
What this means for currencies:
The euro has traded up to 1.0908 against the dollar, which is an important resistance level. It’s likely to consolidate between 1.0825 and 1.0908 until further news emerges (1.0866 as of last night). A convincing break of 1.0908 could confirm a major turning point in the eur/usd pair, and lead to an extended bull trend for the euro. On the other hand, failure to break that level could start a new leg lower for the euro, with an eventual target of parity against the dollar.
This week, news from the US may drive the pair as much as news from France or elsewhere in Europe. Donald Trump has indicated that this week he plans to push tax reform, healthcare reform and funding approval for the border wall. On top of that, the US is now approaching an extended debt ceiling. In other words, there is no shortage of opportunities for his opponents to block his agenda. And that may lead to further dollar weakness.
When it comes to the pound, the announcement of a UK election drove the pound higher - that strength has now been reversed by the rally in the euro. In the short term it’s likely to be news from the eurozone that drives this pair, and then after the UK election, direction may come from the pound again.
If you would like to discuss these ideas in more detail, please don’t hesitate to contact us at Mercury FX for a chat.