The euro surged on Monday following a notable victory by the French far-right in the first round of parliamentary elections — though the result slightly fell short of some projections.
This leaves the final French election result dependent on party negotiations ahead of the second round next weekend.
Marine Le Pen's far-right National Rally (Rassemblement National, RN) party secured a significant lead in the initial round on Sunday, according to exit polls cited by Reuters. However, analysts observed that the party's share of the vote was less than some projections, leading to a boost in stocks and bonds.
The euro rose 0.43% against the U.S. dollar to $1.0762, marking a two-week high.
It had previously declined by about 1.2% since the French far-right's victory in the European parliamentary elections in early June, which led President Emmanuel Macron to call a snap election.
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Markets.com Chief Market Analyst Neil Wilson shared his thoughts on the French election's first-round results in a note on Monday, noting the likelihood of a hung parliament and the precariousness of the French fiscal position:
“French stocks surging, euro gapping up, spreads narrowing again — a relief rally of sorts for assets exposed to French politics, but the centre of gravity has shifted and the Rassemblement National (National Rally) could secure a majority still. [...]
There will be an unusually high number of three-way run-offs due in part to the very big turnout. It is unclear how the Leftists and Centrists will work together to form a “Republican Front” to defeat RN. A hung parliament looks very possible. This could reduce the chance of a big spending splurge, but wouldn’t exactly help sort France’s fiscal position, which is already quite fragile”.
France’s benchmark CAC 40 index surged 2.4% in early trade on Monday — its best one-day rise in close to two years. It later pared its gains but was still up over 1.6% on the day as of 12:30 GMT.
Investors are now concerned that the RN might gain power through a "cohabitation" with incumbent president Emmanuel Macron, potentially advancing a high-spending and euro-sceptic agenda.
"First round results are not offering much certainty about the composition of the parliament, and the second round scheduled for next weekend is the big risk event," said Francesco Pesole, currency strategist at ING.
He added that the left-wing coalition's lower-than-expected vote share was also likely supporting the euro:
“It appears that EUR/USD is getting rid of some political risk premium this morning after preliminary results from the first round of French parliamentary elections came in close to pre-vote polls. Marine Le Pen’s National Rally is projected at 34%, followed by the leftist New Popular Front at 29% and President Emmanuel Macron’s centrist alliance at 22%. The positive reaction in the euro is, in our view, primarily due to some market relief for the New Popular Front not gaining more than expected”.
The euro's rise pushed the dollar slightly lower against a basket of currencies. The greenback was already weakened after data on Friday showed U.S. inflation cooled in May, reinforcing expectations that the Federal Reserve will cut interest rates later this year.
The dollar index (DXY) was down 0.14% at 105.57, a one-week low. Against the dollar, sterling increased by 0.27% to $1.268, while the Australian dollar rose 0.1% to $0.6677.
Market predictions now indicate a 63% chance of an interest rate cut by the Federal Reserve in September, up from a 55% chance a month ago, according to the CME FedWatch tool.
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