Euro Outperforms Pound Sterling and Dollar as President Macron Era Beckons for France

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The Euro bounced in a relief-style rally against the Pound, Dollar and other major currencies after it was shown Marine Le Pen and Emmanuel Macron have gone through to the final round of the French presidential election.

Macron and Francois Fillon were the two pro-market candidates that Euro bulls were looking for to take the crown.

At the time of writing 76.21% of the votes have been counted by the Interior Ministry and confirm a Macron win.

France votes

Above: Courtesy of

From a currency perspective the outcome is a positive for the Euro as Macron is the 'continuity-candidate' for the markets - an ironic label considering he does not come from either of France's major parties.

The Euro would have suffered had Macron come second in the first round and support for Marine Le Pen was shown to be larger than expected.

"Assumptions of a victory for Macron should favour a reversal of OAT-Bund spreads back towards 50bps. We can also expect a boost for the single currency which remains incredibly undervalued. A reduction in political risk will allow investors to focus on the fundamentals which remain increasingly supportive ahead of the ECB this Thursday," says Jeremy Stretch, an analyst with CIBC Capital Markets in London.

Euro is one of best performing currencies in G10

The Euro is rising as the Macron win sees insurance against a Le Pen win withdrawn from foreign exchange markets.

The Pound and Yen have suffered the lion's share of losses owing to the safe-haven quality of these two currencies. Had Le Pen won we would expect the two to be the best performers.

(Yes, the Pound has shown safe-haven tendencies over recent weeks as we note here.)

"The derivatives markets suggest considerable hedges were in place towards an unfavourable outcome. This was very apparent e.g. on the FX markets, where the so called risk-reversals on EUR/USD pointed to extreme hedging positions towards a weakening of the EUR. A significant part of these hedges will probably now be reversed, and the EUR/USD should see a jump towards 1.10," says Jan von Gerich at Nordea Markets.

But some say gains in the Euro are likely to be limited owing to the outcome being the market's expected outcome.

"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 priced-in and any further upside could be short-lived," says Kathleen Brooks at City Index.

Analysts at JP Morgan also see Euro strength as being contained:

"Even on a second-round win by a centrist candidate, we only ever envisioned an initial Euro rally of two to three cents, because the short base in the currency appears small based on both position measures and valuation models."

Macron Win in Second Round Guaranteed

Analysts at Barclays have crunched the numbers and reckon Le Pen has little chance of winning.

"Mrs Le Pen would have almost no chance of winning the run-off since, even adding all of the undecideds and a non-negligible share of first round votes for less popular candidates to her score, she would not be able to pass the winning thresholds, corresponding to each of the participation rate scenarios," says a note from Barclays to clients.

As such, it looks like business-as-usual on the French front.

Macron's Future Effectiveness Questionable

Macron in himself is not necessarily a president who can offer the kind of policies that will lend additional strength to the Euro.

As we have reported here, Macron is at risk of being something of a lame-duck president owing to the fact that he does not lead a mainstream party.

As such his command of parliament might be limited and therefore those reforms that the French economy needs to jump up a gear might not be forthcoming.

"Even if the markets can start feeling relaxed about the risks of France leaving the euro, the domestic situation in France is looking far from comfortable. The country is in big need of reforms in many areas such as the labour market and the public sector. Macron is promising reforms but his chances of putting them into effect are not great," says Lars Henriksson, FX Strategist at Handelsbanken Capital Markets in Stockholm.

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But, Macron not the Best Outcome for Brexit-Britain

"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. But they have not vanished," says Neil Wilson at ETX Capital.

For the UK, Macron is not the best outcome from a Brexit perspective as he has hinted at a hard-line stance against the UK during the campaign.

"Congratulations to Emmanuel Macron supporters, though if he becomes a President, it's bad news for UK negotiations! But we fight on," says David Buik of Panmure Gordon.

Panmure Gordon's economist Simon French goes on to say "as for the UK, Macron is a slight negative regarding Brexit as he is a Europhile who wants to do 'more Europe'. I wouldn’t overstate the impact as it was already going to be a tough gig for the UK to get a credible trade deal. For equities and GBP the 'safe haven story' of the UK is slightly diluted by Macron, but again it is not seismic."

Despite the poor prediction values ahead of the Brexit vote and the US presidential election, the gap in polls between Macron and Le Pen are of a completely different dimension with the average difference in the latest polls of well above 20%.

Of course, there is a small chance of some sort of scandal popping up around Macron.

After the parliamentary election in June he will have to struggle to find support with the two major parties as he will most certainly only have a few of his own in the National Assembly.

"But the domestic struggles in France is nothing the markets will focus on, short term, so we can probably stop worrying about France for now," says Henriksson.


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