The first round of the French election was surprisingly in line with the opinion polls. The independent centrist Emmanuel Macron took the lead with 23.90% of the votes, the much undoubted far-right candidate Marine Le Pen acquired 21.40%.
François Fillon’s support remained just shy of 20%, as French citizens refrained from promoting him as President after a scandal revealed that his wife received some €900’000 from the public money in exchange to little-to-no work.
Jean-Luc Mélenchon scored slightly less than 20% as well, an excellent result per se yet not sufficient to allow him to the final race to the Elysée Palace.
How did the markets react?
In the aftermath of the first round results, the markets reacted as if Emmanuel Macron’s victory was already granted in the second and the final round of the election scheduled on May 7th.
In summary, the markets have already declared Macron as the new President of France. The euro and the CAC 40 rallied, as investors and traders priced out the possibility of a final Le Pen victory, without even giving her a chance to cherish her victory.
Based on statistics, Macron is given a 60% chance of becoming France’s next President. Marine Le Pen is assessed as a less than 40% chance.
Unless there is a major surprise on the opinion polls, the markets are expected to consolidate on the Macron-win scenario. Hence, the final round of the election could be followed by a softer rally and even a potential price correction.
Ceteris paribus, the euro to be driven by the ECB
Given that the markets have priced in the Macron victory as done and dusted, the euro is assumed to be brought up to a ‘fair value’ based on the information that Emmanuel Macron will take the lead of the country. Hence, the future of the euro and the integrity of the Eurozone will no longer be questioned, at least from a Frexit perspective.
Based on the previous assumption, the euro is expected to be driven by new factors, a major one being the European Central Bank’s (ECB) monetary policy outlook.
With the French election considered as being out of the way, an increasing number of analysts expect the ECB President Mario Draghi to review his forward guidance and hint at the policy normalization earlier than previously anticipated. In fact, Mr. Draghi could hint at Quantitative Easing (QE) exiting plans as early as at the June meeting. This is six months earlier than September, as expected till the first round of the French election.
An eventual hawkish shift in the ECB expectations could reinforce the euro appreciation across the board.
What are the downside risks?
The major and the most straightforward downside risk is a surprise rise in Le Pen’s popularity in the opinion polls.
The probability of Le Pen victory is indeed low given that she has a radical view on France’s membership in the European Union and the Eurozone. In this respect, only Mélenchon’s anti-establishment supporters could be tempted to vote Le Pen.
François Fillon and Benoit Hamon already called their supporters to vote for Macron, for the sake of the European integrity.
Given that a Le Pen win could have very drastic and dramatic consequences for the future of France at the heart of the EU and the Eurozone, many French citizens could also be brought to vote against Le Pen, even though they are not necessarily supportive of Emmanuel Macron.
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