GBP/EUR 3-Week Exchange Rate Lows After French Election First Round

July 1, 2024 - Written by John Cameron

STORY LINK GBP/EUR 3-Week Exchange Rate Lows After French Election First Round

The Pound to Euro (GBP/EUR) exchange rate retreated to 3-Week lows around 1.1775 after the French election results.

There was some relief on expectations that the National Rally (RN) would fall short of a majority in next week’s second round, although still with a high degree of uncertainty.

ING commented; “the case for a materially stronger EUR/GBP within the next couple of weeks is not very compelling. (Solid support for GBP/EUR). Key support remains at 1.1765.

In the first round of French elections, RN won around 33% of the vote followed by 28% for the left-wing alliance (NPF) with President Macron’s centrist party in third place.

Attention will now focus on the second round on Sunday with the position complicated by a substantial number of three-way contests.

There will be calls for candidates to drop out to block the RN from winning seats.

Opinion polls suggest that the RN will fall short of an overall majority in parliament.

According to Bank of America; “We expect some EUR recovery in a "hung parliament" scenario.

Commonwealth Bank of Australia (CBA) strategist Carol Kong commented; "They (RN) have actually performed a little bit worse than what was expected,"

She added; "As a result of that, we saw the euro rise modestly in early Asian trade just because we might actually get less fears of more expansionary and unsustainable fiscal policy if the far-right party did a little bit worse.”

Fiona Cincotta, senior markets analyst at City Index took a similar view; "Le Pen had a slightly smaller margin than some of the polls had pointed to, which may have helped the euro a little bit higher on the open."

There had also been some talk that the NPF would do better than expected.

There are still underlying concerns over the underlying outlook.

ING commented; “Still, first round results are not offering much certainty about the composition of the parliament, and the second round scheduled for the next weekend is in fact the big risk event.

It added that bond markets will be important; “We’ll be monitoring closely the performance of OAT versus the bund today. There is a chance of some tightening in the spread which can help the euro, but our rates team continues to view structurally wider spreads beyond the short term and we doubt the euro will be able to entirely erase political risk premium this summer.”

As far as the UK General election is concerned, Labour remains dominant in opinion polls.

According to ING; “There has, indeed, been very little doubt about a Labour landslide win, so the election should not be a huge event for markets. We suspect that a stronger than expected result by populist/hard-Brexiteer Reform UK is the most tangible risk for some slight adverse reacting in GBP assets.”

There has been no significant shift in polls, although with some indication that support for the Reform Party has peaked which could ease political risk slightly.

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TAGS: Euro Pound Forecasts Pound Euro Forecasts