Euro Recovers on Le Pen Promises

File image of Marine Le Pen. Source, Marine Le Pen Officiel.

Euro exchange rates are recovering after Marine Le Pen's weekend comments that she'd work with President Emmanuel Macron should she prevail in national elections later this month.

"I'm respectful of institutions, and I'm not calling for institutional chaos," Le Pen said in an interview. "There will simply be cohabitation."

The move appears to be a response to the negative market reaction to expectations that Le Pen's National Rally party will win a majority in the month-end legislative elections.

French bonds were sold, and the yield they offered investors shot higher, outstripping rises in comparative German bonds. This widening of the French-German spread is a classic signal that investors are attaching risk to France.

The Euro fell to multi-month lows against the Pound in response.

Expectations for either a far-right or far-left victory in the elections would lead to uncosted expenditures being introduced. This led to fears that the French markets could see a bond rout similar to that triggered by former British Prime Minister Liz Truss.

"Fears that a win for Marine Le Pen’s National Rally party in the snap legislative election at the end of the month would spark a market panic similar to the UK’s mini-budget episode under Liz Truss have driven the spread between French and German 10-year government bond yields to the highest since the summer of 2012 when the euro area was in the midst of the debt crisis," says Raffi Boyadjian, Lead Investment Analyst at XM.com.

Le Pen will know such fears will work against her if the electorate becomes nervous. Hence, her attempts to assure markets.

"The market’s reaction has been logical, contained and there is no sign of panic. Investors are reassessing France’s risk premium, but that is normal," says Vincent Mortier, chief investment officer at Amundi. He says that a parliamentary majority for the National Rally, the populist right-wing party led by Marine Le Pen, would not create a "hock to confidence" for investors.

If peak fear regarding France has been reached, the Euro can recover further. However, we wouldn't expect it to reverse all its losses until after the election.