How will French Presidential Election Affect the EU and the Euro?

The upcoming French presidential election lift market concerns over the political uncertainties in Europe, and investors’ risk aversion sentiment. Be aware that the election outcomes will likely cause volatility for the Euro, Euro crosses, European stock markets and safe havens.

The first round of the French election will be held this Sunday April 23. Altogether there are eleven candidates. If none of the candidates gets more than 50% of the votes in the first round, the two winners will enter the second round of the vote held on May 7.

The recent polls showed a tightening race between the top four candidates: Macron, Le Pen are both 22%, Macron and Le Pen got a lower share of the vote compared to 23% from a previous poll. The far-left candidate Jean-Luc Melenchon, has slipped to third position, with 20% of voters, which surpassing Fillion’s 19%. The difference of votes between the 4 candidates is less than 3% which poses more uncertainty to the election.

The far-right wing Le Pen, and the far-left wing Jean-Luc Melenchon are the focuses of the election because of their extreme political stances. Jean-Luc Melenchon is the only candidate among the four whose share of vote saw an increase recently.

The consensus is that the Centrist Macron and the far-right wing Le Pen would likely get into the second round, then Macron would likely win the final vote. The most embarrassing situation is that the far-right wing Le Pen and the far-left wing Mélenchon both get into the second round, which will likely result in further rallies of safe havens, lower European stocks and a falling Euro. EUR/USD will likely plunge, targeting 1.0300.

Le Pen takes a similar stance to Trump, the focus of her policies is France first, including anti-globalization, anti-immigrants, trade protectionism, repealing the Euro and reusing French Cyan, and most noticeably: making France leave the EU.

Many French voters are in favour of Le Pen’s policies, due to France’s high unemployment rate and recent terror attacks; provoking citizens’ anti-foreigner sentiment. France and Germany are the EU’s largest economies. If Le Pen wins, France might leave the EU, following Brexit, will likely cause substantial impact on the EU. Other member states might also follow, the EU will likely face the crisis of falling apart, which will result in a slump in the Euro and European stock markets, and pushing safe havens such as gold and the yen further up. EUR/USD will likely see a plunge, targeting 1.0000, and European stock markets will likely drop between 10%-20%.

The far-left wing Melenchon’s policies are communism-backed, such as reduction of working hours to 32 per week, retirement age lowered to 60, tax increases for the wealthy, against the EU and NATO. His campaign slogan is ‘'Change or leave Merkel's Europe? Out of the European treaties'’. If Melenchon wins, it will likely weigh on the Euro and European stock markets. However, the impact should be smaller than that caused by Le Pen’s victory. EUR/USD will likely see a fall, targeting 1.0300, and European stock markets will likely fall between 5% to 10%.

The independent centrist Macron is in favour of free trade and the integrity of the EU. The major focuses of his policies include labour market progress, jobless benefits reduction, public sector workforce cut and a cut in corporate tax. HIs measures aim to change the country’s long-standing bureaucracy and excessive government control to revive the sluggish economic performance. Macron’s policies will likely effectively reduce the number of unemployed, increase investments and save a large amount of spending which could be used on improving economic growth.

Fillion and Macron’s policies have some similarities. Fillion has lost supports by many neutral voters due to the fake parliamentary job scandal. However, he has a large committed Catholic voter base accounts for 79% of his supporters.  

Non-voting share and undecided voters are likely to play decisive roles in the election. The IFOP polls showed there are about 31% non-voting and 28% undecided voters. The candidates have been trying to win undecided voters’ supports in the final sprint of the race.       

Although Macron is the top candidate, he doesn’t have a large committed voter base comparing to Le Pen and Fillion. Macron and Mélenchon are the two candidates among the four with the highest share of undecided voters (60% for Macron and 47% for Mélenchon). The bigger the nonvoting share, the more adverse to the two candidates. Consequently, it will increase the probability for Le Pen and Fillion to win, as they have larger committed voter bases.

If Le Pen and Melenchon lose, no matter who is the victor out of Macron or Fillion, the Euro and European stocks will likely rally as market concerns over the collapse of the EU would be relieved. EUR/USD will likely see a surge, targeting the range between 1.0900 – 1.1000, and European stock markets will likely rally between 5% to 10%.