EUR: Markets still assessing French election result

A hung parliament was widely expected in France, but the surprise win by the left-wing coalition may cause market concern ahead of coalition talks. Still, Macron’s party coming in second may offer some balance and limit the rewidening in French bond spreads. The Euro (EUR) should still be a laggard in our view. In the US, Powell and CPI are the highlights this week, ING’s FX analyst Francesco Pesole notes.

Markets seem more comfortable with the far right than with the far left

“The second round of parliamentary elections in France delivered a surprise result, a hung parliament and two main scenarios: difficult coalition talks or a technocratic government. The positive market reaction after the first round gave an indication that investors were more comfortable with the far right than with the far left, which is perceived as a greater danger to the already fragile French fiscal position.”

“Those fiscal concerns are probably behind the euro trading around 0.2% below its Friday close at 1.0820 after having tested 1.0800 last night. From an FX perspective, there are lingering risks for the euro moving on, and we continue to see the common currency as a likely laggard in the G10 space in an environment that can still support pro-cyclical currencies on the back of softening US data.”

“The absence of market-moving data releases in the eurozone this week and the European Central Bank about to enter the quiet period ahead of its 18 July meeting will contribute to making the coming days all about French political developments. We think EUR/USD can trade below 1.08 on the back of that before US macro developments take over.”

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