Euro Exchange Rate Scenarios on France’s First-Round Election Outcome: The HSBC View
- Pound to Euro Exchange Rate: 1.1945
- Euro to Pound Sterling Exchange Rate: 0.8377
- Euro to Dollar Exchange Rate: 1.0729
HSBC have updated clients with their view on potential moves in the Euro on the outcome of this weekend’s first-round of the French presidential election.
Ahead of the election we note uncertainty as to the outcome of the election remains as high as ever. However, the probability of a Macron victory still remains the highest.
The overnight terror attack in Paris has however increased uncertainty on the outcome with some analysts saying that the event could play into Le Pen’s hands.
And, the average polling error for the first round of past French elections has been six percentage points, suggesting that the scope for a surprise relative to the consensus expectation of a Macron / Le Pen run-off remains high.
“The Paris gunman attack may well swing support in her favour; and this may not be picked up by the polls in a timely manner,” says Vishnu Varathan at Mizuho Bank.
Whatever the outcome, those with a stake in the foreign exchange markets would do well to gauge where the Euro might go on either outcome.
The result remains unpredictable and the market reaction afterwards will depend largely on the candidate combination in the second round.
HSBC's Scenarios for the Euro on Round 1 Outcome
We have four likely scenarios according to Dominic Bunning, Strategist with HSBC Bank plc in London:
- Good-good: Macron vs Fillon – EUR-USD to rally towards 1.12
- Good-bad: Macron vs Le Pen – EUR-USD to remain range-bound between 1.0350 and 1.09 tending to the upper half of the range
- Bad-good: Le Pen vs Fillon – EUR-USD to remain range-bound between 1.0350
and 1.09 tending to the lower half of the range - Bad-bad: Le Pen vs Mélenchon – EUR-USD to fall sharply towards 0.90
Interestingly, “We believe both GBP and PLN might face significant downward
pressure in the event of a “bad-bad” outcome for the EUR,” says Bunning.
This is interesting, particularly if we consider how negative market conditions have tended to favour the British Pound of late.
Sterling has become something of a safe-haven for investors in a month that has seen the US strike targets in Syria and flare-ups in Russia-US and US-North Korea tensions.
The assumption at HSBC is therefore that this relationship with risk will completely flip.
HSBC argue GBP has tended to move in a similar direction to the EUR in recent months with a correlation of daily changes versus the USD of around 50%.
“But the GBPUSD options market is nowhere near as expensive to protect against downward moves. Given a bad-bad outcome could create economic instability which would likely hurt GBP relative to the USD, this may be a cheaper way of protecting against such an outcome,” says Bunning.
“The market will closely watch exit polls released on Sunday evening. Unless the race is very tight, we should have a good indication of the outcome around midnight or in the early hours of Monday morning,” says Aila Mihr, an analyst with Danske Bank in Copenhagen.
Scenarios for the Euro
1) Good-good: Macron vs Fillon
“This would be the most positive outcome for the EUR. Any perceived risk of France leaving the eurozone and an impending break-up of the currency union would dissipate almost immediately. Neither of these candidates supports such a policy.
“In this scenario that probability would fall to zero, which would imply a rally of over 5% in EUR-USD. The March high around 1.0905 would come quickly into play and a break through that resistance could open up a move towards 1.12 – a level not seen since the US election.
2) Good-bad: Macron vs Le Pen
“This is currently the most likely outcome according to the opinion polls, and as such it seems unlikely the EUR would react too aggressively in either direction. We would expect the broad range on EUR-USD between 1.0350 and 1.09 to remain intact until the 2nd round vote on 7 May.
“The percentage of the vote won in this scenario should also have an
impact. If Macron’s share of the vote is in the high 20%s and if he is the lead candidate, then we think the EUR would push higher. If the same is true for Le Pen, EUR-USD would be likely to hug the bottom of the range over the following two weeks.
3) Bad-good: Le Pen vs Fillon
“EUR-USD would likely remain range-bound in this scenario, similar to the above but with a greater likelihood of pushing to the bottom of the range. Fillon currently has a smaller lead over Le Pen in the 2nd round polling, and so in this scenario the FX market could be looking to price in a greater risk that the Front National candidate would be the next President.
“Again, the vote tallies could be important. The bigger the portion voting for Le Pen, the greater the downside risk for EUR-USD.”
4) Bad-bad: Le Pen vs Mélenchon
This would be the worst case scenario for the EUR. Both candidates are explicitly Eurosceptic. Le Pen has actively campaigned to leave the EU and the EUR.
Mélenchon’s views are slightly less overt but he has spoken about a referendum on single currency/EU membership. With the very real risk growing in this scenario that France’s next President might take the eurozone’s second largest economy out of the bloc, the EUR could fall hard.
“The relationship between EUR-USD and Le Pen’s probability of victory suggest a move towards 0.90 is possible in this scenario. This potential fall of 16% chimes with the scale of depreciation seen in other currencies in the aftermath of a destabilising political event.”
