National Coalition leader Jordan Bardella reacts to the initial election results.
The euro and European assets are rising after Marine Le Pen's National Rally party did less well than some expected in Sunday's election, but a volatile week lies ahead for both the euro and the dollar.
The euro rose 0.4% to trade at 1.0755 against the dollar as markets welcomed signs that neither the far left nor the far right will control the French parliament after the second round of voting this Sunday.
This comes after the first round of voting showed Marine Le Pen's National Rally performing less well than expected, only receiving around 34.2% of the vote at the time of writing, compared to around 36.2% in final opinion polls.
“The first round of the French election may not have been as successful for the far right as the final opinion polls suggested, and with other parties seemingly ready to form coalitions in the second round, it may be even less likely to win a majority in parliament. This has sent the euro up 0.40% overnight to trade at 1.0756 against the dollar,” said Jim Reid, strategist at Deutsche Bank.
The New Popular Front is estimated to have around 29% support, while Macron's coalition government, Ensemble, has around 22%. The New Popular Front has said it will eliminate the third-place candidate, which would destroy the Rally National's chances of winning any seats in districts with three-party contests.
More than half of the record 577 seats are expected to proceed to a second round of voting, increasing the likelihood of strategic voting.
“Financial markets breathed a sigh of relief following the French election results, sending the euro higher earlier this week,” said XTB analyst Kathleen Brooks. “Marine Le Pen's party won the most votes, but the far-right may find it difficult to secure a majority in the second round.”
Image courtesy of France 24.
French President Emmanuel Macron on Sunday called for a “broad” democratic alliance to counter the far-right, after his National Rally party was presumed to have won the first round of parliamentary elections.
“In the face of a national coalition, the time has come to assemble a broad, clearly Democratic-Republican coalition for the second round of voting,” he said in a statement, adding that the high turnout in the first round spoke to “the importance of this vote for all our compatriots and the desire to clarify the political landscape.”
Looking at the calendar, there are a number of announcements and speeches scheduled for the coming week that could cause volatility in EURUSD.
The US ISM manufacturing index is due to be released on Monday and could provide further signs of an economic slowdown, while German inflation figures are also due to be released on Monday.
Eurozone inflation will be the focus of data this week when it is released on Tuesday, but expectations for the outcome of Sunday's French referendum are likely to keep any reactionary movements in check.
European Central Bank (ECB) President Christine Lagarde and Federal Reserve (Fed) Chairman Jerome Powell will speak at the ECB's central bank meeting in Sintra, Portugal, on Monday and Tuesday. Lagarde's comments will be important regarding market expectations for further rate cuts as debate continues over whether there should be one or two rate cuts for the rest of the year.
The market will be interested to hear Chairman Powell's latest thoughts on a possible September rate cut.
This theme will continue through mid-week when the Fed releases the minutes from its June 11-12 policy meeting, which will provide further color to the market on the all-important issue of interest rates. Wednesday also sees the release of the ISM PMI survey for the services sector, another release that could potentially move the market.
Just to be clear, if these data and announcements lead the market to expect a rate cut in September, the dollar could fall. If there is disappointment, the dollar will rise. Currently, the market is pricing the likelihood of a rate cut in September at 56%.
The highlight of the week is Friday's nonfarm payrolls report. The headline figure is expected to fall from 272,000 to 188,000. Average hourly earnings are expected to increase 0.3% in June compared to the previous month.
Looking further ahead, UOB strategists say the broader picture for the euro/dollar is constructive.
“The price movement appears to be part of an ongoing triangle formation. The current level of the bottom of the triangle is 1.0640 and the apex is 1.1000. With the weekly MACD being slightly positive, the bias for EUR/USD in the third quarter of the year is tilted to the upside towards 1.1000. At this point, it is unclear whether EUR/USD has enough momentum to break through this key resistance level,” said Quek Ser Liang, market strategist at UOB.
“Overall, the euro needs to make a clear break below or above the triangle for a more sustained directional price movement to be expected,” Leand added.
