Jane Foley, Senior FX Strategist at Rabobank, explains that with just days to go before the first round of the French Presidential election, EUR is being driven by the polls outcome uncertainty.
“Anxiety levels have been stoked by the rise in support for the far left candidate Melenchon. He is now just a few percentage points behind the leaders in the opinion polls. Given the inaccuracies of opinion polls in recent years, the high number of undecided voters and the risk that abstention levels could be lower for voters shifting towards political extremes, there is a risk that the first round of the French Presidential election on Sunday could put through both Melenchon and Le Pen into the run off next month.”
“For the markets, neither a Le Pen nor a Melenchon Presidency would be welcome result. Le Pen has stated her plan to exit the EUR. Although she may not be granted parliamentary approval for a referendum, her threats have already been associated with the risk of a debt default in France. In addition to a promise to leave Nato, Melenchon is campaigning on pledges of a retirement age of 60, a 32 hour workweek and a ceiling on salaries. In short he would counter the benefits of the moderate French labour reforms pushed through in recent years and spark concern about the outlook for the budget deficit and debt outlook.”
“Although EUR shorts increased again this month, they stand well below the levels at the end of last year. This suggests that the EUR is now more exposed to a negative shock. Opinion polls still suggest that it will be the moderate and pro-EU candidate Macron who is likely to win the French Presidency and we would expect the EUR to push higher on relief on Monday if he is confirmed as one of the last two remaining candidates after Sunday’s first round election. A success for the market-friendly Fillon is also likely to be supportive for the EUR. However, if Macron is beaten by both Le Pen and Melenchon, we would expect the EUR to tumble.”
“How far EUR/USD could fall on a populist victory in the French election will be in part influenced by the outlook for the USD. The recent spate of disappointing US economic data coupled with the acknowledgement by US Treasury Secretary Mnuchin has deflated some optimism about the Trump reflationary trade. Expectations regarding the likelihood of a June rate hike from the Federal Reserve have dropped back and we see risk that the Fed could sit tight on policy until December. On this assumption we expect a broadly softer USD to emerge over the coming months. That said, a populist President in France raises the risk that EUR/USD could see parity near-term. Our core view is for EUR/USD to trade around 1.08 on a 3 mth view rising to EUR/USD1.10 by year end.”
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