The EUR/USD Exchange Rate Could Hit 1.12 on Macron’s 1st Round Win

The Euro exchange rate complex has risen following news Emmanuel Macron is headed for the Élysée Palace.

Macron was seen winning the first round of the French election, ahead of Marine Le Pen who is widely seen as being the Euro-negative candidate.

The latest Kantor exit poll has Macron with 23%, while Le Pen won 22% of the vote, Fillon and Melenchon eliminated at the first poll.

The initial reaction has been a surge in the Euro, which is already up nearly 2%, above 1.0900, a 5-month high.

“This was the expected result, as predicted by the pollsters who were correct (for once!), thus one could assume that the market reaction has already been pried in and any further upside could be short-lived,” says Kathleen Brooks at City Index.

However, Brooks says the market reaction could be stronger than expected as investors’ begin to price in an easy win for Macron in the second round, and we could see EUR/USD rise to 1.12, the high from before the US election last year.

"The outcome should be positive for French government bonds, the euro and risk sentiment," says Nick Kounis at ABN Amro. "However, markets partially priced in a positive outcome in the run-up to the elections – at least as far as French bonds are concerned - which could to some extent limit the reaction. In our base case scenario of a Macron victory, we expect the 10-year French-German spread to fall back and stabilise at around 50 basis points and EUR/USD to rise to around 1.10."

Tonight’s result is market positive for a few reasons says Brooks: “firstly, Macron is a politically stable, centrist candidate, almost like France’s Obama.

“Even though he would be France’s youngest ever President with no party behind him, he is considered a safe pair of hands.

“Secondly, it helps to solidify the future of the EU and the Euro.”

At the start of a new week the Euro is surging, and City Index expect a large gap higher in the Dax and Cac 40, we could also see French bond yields fall on Monday, once this result is confirmed.

"The market nightmare scenario has been averted with Macron set to face off against Le Pen in the second round. With pollsters and analysts giving the FN candidate virtually no chance in the second round against Macron, those really big worries that many had coming into this election - the risk of ‘Frexit’ and a breakup of the Eurozone - have definitely subsided," says Neil Wilson at ETX Capital.

Second round: Anyone but Le Pen…

So, why are Marine Le Pen’s chances of winning the keys to the Elysee Palace so weak, after she polled decently in the first round?

“The reason is that she failed to win the 30% of the vote that was considered a threshold for her to stand a chance to win the second round in two weeks’ time. In contrast, Macron’s chances of winning the second round are much higher even though his victory over Le Pen was fairly narrow tonight,” says Brooks.

One reason for this anomaly is that Macron is hovering up support from the eliminated candidates including Hamon and Fillon, who have chosen to back the independent candidate rather than the controversial Far Right Le Pen.

Why European stocks could outperform the euro on the back of this result

City Index have said in the past, Le Pen essentially threatens the existence of the EU and the organisational system of an entire continent.

“Thus, if she is unlikely to win the second round, then we could see some further upside for the Euro. However, the impact could be short-lived, especially since the ECB is expected to maintain policy and its forward guidance to commit to QE until at least the end of 2017 when it meets on Thursday, which could restrain euro gains,” says Brooks.

In contrast, the reaction in the stock market could be much larger. Bank of America Merill Lynch released an investor survey last week that found investors’ bullish on the outlook for European stocks, which they believe to be undervalued compared to US stocks.

“Thus, if Macron looks like a shoe-in for the Elysee Palace in two weeks’ time this could reduce political uncertainty across the entire EU, and we could see money pile into European equities at the start of a new week,” says Brooks.