In an interview with FXStreet, we discussed everything related to the French presidential elections. The top political market mover of the year is watched with great tension by EUR/USD traders and could have a long-lasting impact on the common currency and the European Union.
You can read the interview at its original publication here or below:
How low can the EUR/USD go if Marine Le Pen wins the French election?
A victory for Marine Le Pen has very small chances but could have grave consequences for the euro. The mere idea of France leaving the single currency could set the snowball rolling and turn into an avalanche. Even if French voters reject a proposition to leave the euro and even if Le Pen backs down from her desire to put the question on the ballot, her victory could easily send EUR/USD below parity and all the way to 0.90. There is no euro without France, the core of the core.
And how high can it rise if Le Pen is not the next French president?
EUR/USD has room to the upside in case Le Pen is defeated by either Macron or Fillon. The baseline scenario is for her to be kept out of the Elysee Palace, but it is not fully priced in. A rise to 1.10 or even 1.12 could be seen. The reactions to the first and second round will probably differ according to who makes it to the second round. As Macron has better chances to beat Le Pen than Fillon, we could see a big chunk of the upside move happening already after the first round on April 23rd, in case Macron indeed makes it to the second round. Another sigh of relief that translates into another rise for the euro could come on May 7th, albeit at a much smaller scale. If Fillon makes it to the second round, we could see the euro drop after the first round and make a big leap on Fillon’s victory in the second round.
How big of a risk will the French election be for the markets?
The French elections are a “low probability, high risk” event. The chances for a Le Pen victory are much lower than Brexit and Trump. Last year’s big political upsets were preceded by very close opinion polls and the results were within the margin of error. This time polls clearly show Le Pen losing to just about anyone. However, France is not Greece and not the Netherlands. Its importance is huge. It seems that the euro is held back by the upcoming elections. Markets are “bitten once, twice shy” as the expression goes, with a somewhat exaggerated fear about the outcome following last year. A victory for Macron or Fillon could unleash the common currency. Stronger economic growth and higher inflation justify a stronger euro.
