French Election Uncertainty Weakens Euro

8 Jul 2024 , 09:42 AM

The euro and French bond futures sank after French elections resulted in a hung parliament, adding to market concern as a period of deadlock loomed.

In Asia trade, the euro fell by 0.2% to $1.0819, and long-term French bond futures fell 20 ticks, resulting in an expected yield of 3.13%.

The dollar stayed on the back foot following disappointingly dismal U.S. payrolls data on Friday, which increased betting that the Federal Reserve may begin cutting interest rates as early as September.

The yen was poised for a third day of advances after recovering from last week’s almost 38-year low against the dollar.

Sterling reached a three-and-a-half-week high against the US dollar as the British currency strengthened following the Labour Party’s resounding election victory last week, which ended 14 years of Conservative dominance.

Analysts believe markets would be relieved that Marine Le Pen’s far-right National Rally (RN) is expected to finish third rather than first in the second round, as polls had indicated.

However, investors are concerned that the left’s ambitions will undo many of President Emmanuel Macron’s pro-market measures, and that a deadlock could jeopardise efforts to reduce France’s debt, which stood at 110.6% of GDP in 2023.

Cash trading in French bonds and equities will start on Monday morning in Europe. The broader financial markets moved modestly.

The dollar index, which compares the US currency to the euro, sterling, yen, and three other major rivals, was unchanged at 104.97, nursing its wounds after a 0.9% drop last week, aggravated by Friday’s weaker US employment market estimate.

According to the CME Group’s FedWatch Tool, traders have set approximately 76% odds for a rate drop at the Fed’s September meeting, up from 64% a week ago.

The dollar fell 0.07% to 160.70 yen, down from a high of 161.96 on Wednesday.

Following the election, France’s 577-seat assembly is divided into three major groups: the left, centrists, and extreme right, each with vastly divergent platforms and no history of collaboration.

Polls, which are often correct, predict the left will win 184-198 seats, Macron’s centrist alliance 160-169, and the RN and its allies 135-143. Constituency results were slowly filtering in, with the majority expected by early Monday morning.

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