Euro Exchange Rates Unmoved As Political Uncertainty Continues In France (2024)

A surprise win for the left-wing coalition in the French elections has ensured more political uncertainty.

Le Pen’s National Party slipped to third place.

A hung parliament and the potential for political impasse will weigh on the euro and European stocks.

European markets reflect some relief on Monday as the second round of the French election concluded with the Eurosceptic National Party falling into third place. However, the outcome is far from ideal as no party won a clear majority and the French parliament will be paralyzed by a three-way split. Certainly, there has been no euphoric rally in the euro like there was when Macron defeated Le Pen in 2017. Indeed, the euro is slightly lower against the US dollar and is –0.08% against the pound. French stock markets are opening unchanged from Friday’s close which saw some nervous selling into the weekend break.

No End to the Uncertainty

A majority for the National Party would have been bad news for the euro and for European stocks as Le Pen would take every opportunity to weaken the EU and the promise of tax breaks suggested fiscal irresponsibility. The market’s worst-case scenario has therefore been averted, but the outcome in the French election is far from ideal. Firstly, the left-wing coalition surprisingly came in first, ahead of Macron’s centrist alliance. The National Party slipped into third. The left-wing may be less hostile to the EU, but they could be bad news for France’s finances.

“One of the leaders of the NFP, Jean-Luc Melenchon said the NFP plans to strictly implement its programme, which includes an increase in public spending to support social measures including higher minimum wages and an unwinding of Macron’s reform that increased the retirement age,” reports ING.

Indeed, markets may have been more upbeat with a National Party victory than with the NFP. That said, neither the NFP or any of the other parties are likely to get a lot done as the three-way split likely leads to political impasse. NFP have 182 seats, Macron’s Together has 163 and RN has 143. The Guardian sums up the position like this:

“... a hung parliament of three opposing blocs with hugely different platforms and no tradition of working together – and, under the terms of France’s constitution, no new elections for a year.”

It’s hardly a surprise that markets are far from euphoric on Monday morning.

What Next?

While the political wrangling has only just started, markets are likely to move on to other issues. There is no immediate threat of volatility and with the French and UK elections concluded, political focus will likely move to the US and Biden’s shaky grip on power. The focus in Europe, meanwhile, will get back to data and the key issue of inflation and the timing of the next ECB rate cut.

This week’s data and events are centred almost entirely on the US. Fed Chair Powell is due to give his Semi-Annual Monetary Policy Report before the House Financial Services Committee in Washington DC on Tuesday and Wednesday. The issue is whether last week’s weak data and concerning rise in unemployment will change his tone. The odds of a September cut have risen above 70%, but there seems little chance of an early cut in July as the odds are still below 10%.

US inflation data is also due out on Thursday and is expected to come in at 0.1%. This reading would take the YoY figure to 3.1%; a major step in the right direction. This would surely open the door for a September cut.

BoE officials may also be active this week now the UK election has concluded. Jonathan Haskel will speak on Monday, while Huw Pill and Catherine Mann are due to comment on Wednesday.