EURUSD - Initial Relief Amid Uncertain Election Outcome

At the beginning of this week, the euro saw a modest increase following the first round of the French elections. This resulted in the EUR/USD reaching a high of 1.0776 and the EUR/GBP rising to 0.8500. Investors are optimistic that Marine Le Pen's National Rally (RN) Party might not achieve a parliamentary majority. However, the outcome will be determined after the second round of elections on July 7th. The initial results closely aligned with opinion polls, predicting the RN party would secure about 33% of the vote. The left-wing New Popular Front coalition is expected to receive around 28%, while President Macron’s centrist alliance is anticipated to garner about 21%. The centre-right Republicans are projected to obtain roughly 10%.

EURUSD H1 

 Source: FinlogiX Charts Strong Showing for Le Pen’s RN Party

Contrary to hopes for a decrease in RN support compared to the EU elections held earlier in June, Le Pen’s party performed well and is on track to become the largest party in parliament. Other political factions, including President Macron’s centrist alliance and the left-wing New Popular Front coalition, are strategizing to prevent the RN from achieving a parliamentary majority in the upcoming second round.

French Elections Pools 

 Source: POLITICO (France legislative elections 2024)Strategic Withdrawals to Block RN Majority

French Prime Minister Gabriel Attal has stressed that the primary goal is to stop the National Rally from securing an absolute majority. This sentiment is echoed by Jean-Luc Mélenchon, leader of the far-left France Unbowed party, who has called on third-placed candidates from the left-wing faction to withdraw in situations where it could enhance the chances of defeating RN candidates. In more than half of the 577 constituencies, three candidates have qualified for the runoff. In these cases, the third-placed candidate can step aside to increase the likelihood of another party's candidate winning against the RN.

Potential Outcomes and Euro Outlook

President Macron’s Renaissance party has signalled a willingness to pull out third-place candidates to back those who uphold "the values of the republic" against the far-right. However, it remains uncertain whether they will make such withdrawals in cases that might benefit the far left. The deadline for these decisions is 6 PM on Tuesday. Based on current results, the two most probable outcomes are a hung parliament without an absolute majority or an RN cohabitation government. The high number of constituencies won by the RN, coupled with tight races between left and centre candidates, complicates strategic withdrawals and heightens the risk of an RN cohabitation government, which would be less favourable for the euro. Consequently, the euro’s current relief rally is unlikely to persist ahead of the second election round.

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