Euro + Pound Dip Against Dollar as French Election Fever Rises

• Pound to Euro exchange rate (7-2-16 London PM): 1.1588
• Euro to Pound Sterling rate: 0.8630
• Euro to US DOllar rate: 1.0675

The Euro and Pound Sterling were put under pressure on global foreign exchange markets as political concerns continue to influence market movements.

Markets are becoming increasingly attuned to the Presidential election narrative in France which has resulted in a broad risk-off flavour to market sentiment.

The Euro is the obvious target for such disquiet, but the Pound - a seemingly high-risk currency - is also feeling the heat as traders bid for the Dollar.

"The safe-haven plays are once more in demand, gaining ground as politics again looks to play a key role in market moves. With concern over political risk in the Eurozone rising, surrounding the French Presidential election, the yields on French OATs have pulled sharply higher. This is putting pressure on the Euro which is beginning to weaken against the US Dollar," says Richard Perry, an analyst at Hantec Markets in London.

The big risk in regarding the French election is of course candidate Marine Le Pen who continues to advocate for France's withdrawal from the European Union. 

We note here that a Le Pen victory could put a rocket under the Pound/Euro exchange rate.

A first round win for Le Pen is likely, however, political analysts believe a second-round win for her would be an enormous challenge.

"Yet this sounds very familiar and parallels can easily be drawn with Trump and even Brexit, which is why the markets are starting to look towards safe havens and simultaneously sell out of the euro, trades which will amplify as we move closer to election date should Le Pen look to be increasing in popularity," says Fiona Cincotta at City Index in London.

Euro Feeling the Heat of French Politics

We have noted over recent days that the Euro is starting to feel some pressure as the French vote approaches with some key Euro-based currencies showing signs of political discounting.

While Fillon’s victory could be good for both the Pound and the Euro, a Le Pen win would have the impact of seriously denting the value of the single currency.

For analyst Kit Juckes at France's Societe Generale, “the French election campaign isn't getting any less worrying.”

Juckes argues the Dollar correction lower, “is masking the Euro's underperformance. It's in the European crosses where euro weakness since the new year is clearer, for example in EUR/CHF, EUR/SEK and EUR/NOK.

“The spread between OATs and Bunds is reflecting the gradual rise in the French political risk premium,” says Juckes.

Juckes notes that, centre-right politician Francois Bayrou sounds as though he may well stand and further muddy the waters.

Bayrou would not be expected to make the second round, but he would take some support from Fillon, and potentially, from Macron as well.

"That increases the possibility, if Hamon were to get Melenchon to support him, of a Le Pen/Hamon second round shoot-out. In that case, the return of a Socialist president after the disappointment of Hollande, would be the best pro-Europeans could hope for," says Juckes.

The analysts argues this is a messy enough election that markets are bound to price risk into the FX market at some point.

Latest polling suggests Le Pen and independent centrist Emmanuel Macron are set to make it through to the presidential election's second round in May, according to an opinion poll published on Monday, with Macron comfortably winning the runoff.

The IFOP rolling poll of voting intentions showed Le Pen garnering 25.5% of the vote in the April 23 first round, up 1.5% since February 1, while Macron would get 20.5%, up 0.5% over the same period.

Conservative candidate Francois Fillon placed at 18.5%, down from 21%.

Socialist candidate Benoit Hamon has lost momentum since his nomination in a primary vote, and was now seen gathering 15.5% of the votes, down from 18% on February 1.

Fillon Still in = Good for Pound Longer-Term

News that one-time favourite Francois Fillon is still in the game is to be taken as a positive for the British Pound we believe.

Fillon firmly refused on Monday January 6 to drop out of the race to be France's next president despite an investigation into whether well-paid political jobs he gave his wife, son and daughter were genuine.

"I have nothing to hide," Fillon told a news conference aimed at putting a line under the speculation over his ability to stand and win the election.

"All acts described (in the media) are legal and transparent," he said.

Many media commentators were speculating that the conservative candidate could stand down at the press conference.

Barclays tell Pound Sterling Live Fillon's vision for Europe is one that is similar to that of the UK's - in which intergovernmental agreements play a greater role than the fostering of a European suprasoverign state.

He advocates the return of powers to member sovereign states rather than deeper integration.

Barclays reckon this might help the UK’s Brexit negotiations as it would position France more closely to the UK’s view of what Europe should be than the previous French ideal of a suprasoverign European state power.

Fillon has also argued for a quick resolution to Brexit indicating he is unlikely to ‘dig his heels in’ during negotiations, which also seems to point to an easier more painless path for the UK’s departure.