Pound / Euro and French Elections: Decent Macron Lead Could Spur EUR/GBP Buying on Monday

Image © European Union.

The Euro could benefit should President Emmanuel Macron secure a commanding lead in this weekend's first round of France's presidential elections, say analysts.

Macron will be pitted against Marine Le Pen, who has improved her standing in the polls leading to expectations for a close outcome in the second round vote.

"The latest polls ahead of the French Presidential Election still have Macron keeping the Elysee Palace. However, his lead has narrowed noticeably," says Jane Foley, Senior FX Strategist at Rabobank.

The latest YouGov and Datapraxis poll shows that in a run-off round between the Le Pen and Macron, the former would receive 49% of the vote, the latter would be re-elected by just 51%.

This is a statistical dead heat that leaves markets considering what a Le Pen presidency would mean for France and the markets.

The poll confirms a trend of improvement for Le Pen reported by most other polls.

"The pace at which Le Pen has been closing in on Macron’s lead in the past couple of weeks has led many commentators to the view that there is a tangible chance that the Presidency could go to the far-right," says Foley.

Analysts say the tightening in polls and proximity of Sunday's vote could be a factor in the Euro's underperformance over the past week.

"The economic malaise wrought by the war in Ukraine, political uncertainty in France, the bloc’s No. 2 economy, and expectations for the Fed to raise rates more aggressively than the ECB over the coming year have been the driving forces behind the euro’s retreat," says Joe Manimbo, Senior Market Analyst at Western Union.

Le Pen has dropped previous ambitions to take France out of the EU, removing an obvious risk to Euro exchange rates posed by her victory.

But she aims to nevertheless reduce France’s role in the EU, "additionally, her aims at lowering the pension age to 60 and cutting taxes on energy are suggestive of the market-unfriendly tone of her policies," says Foley.

Analysts say some of the Euro's recent underperformance could be attributed to rising anxieties relating to the election.

"FX markets had possibly remained too complacent with regards to the French political risks," says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole, when observing the Euro's lacklustre performance of recent days.

(Indeed, the Euro-Dollar exchange rate has fallen into the 1.08s, Euro-Pound close to 0.83 ensuring the Pound to Euro exchange rate tested above 1.20 on Friday to deliver the best exchange rates of the month so far. Set your exchange rate alert, here).

Above: EUR/USD at daily intervals (top) and EUR/GBP (bottom).

The Euro could come under pressure on Monday were Le Pen to do better than expected in the first round and lead investors to price in a higher probability of a victory.

But, were Macron to secure a convincing share of the vote the Euro could rally.

"The EUR now in our view discounts a better balanced pricing of the election risks/uncertainties, while the EUR could still be poised for some adjustment at Monday’s open depending on the outcome of this first round. Any comfortable lead for President Macron is likely to spur some relief rally in the EUR," says Marinov.

Voting takes place on Sunday and late on Sunday night, around the time markets open in Asia, we should therefore get a sense of how the election is progressing for the leading candidates.

Marinov says any surprises eventually implying a greater chance for Le Pen to become France’s next President could keep Euro exchange rates under pressure in the run-up to the 24 April second round.

"It has to be noted though that the stakes do not seem as high as five years ago, as importantly none of these candidates have campaigned on the threat to leave the Eurozone. Therefore, any eventual jitters should remain relatively contained," says Marinov.

Were Macron to comfortably win the first round foreign exchange market focus is likely to rapidly switch to the meeting of the European Central Bank on Thursday, where guidance on the prospect of future interest rate hikes will likely be delivered.

The Euro found support on Thursday after the minutes to the March meeting showed the ECB was increasingly of the view interest rates will need to rise to meet the challenges posed by surging inflation.

Should this view be confirmed on Thursday the Euro could be supported further.