The unexpected victory of the left-wing alliance in the French parliamentary elections on 7 July, and the prospect of a parliament with no clear majority, have heightened uncertainty about the country’s fiscal future. As an immediate consequence, the euro fell on 8 July. A volatile political situation begets a volatile stock market.
A fall of 0.06% to 1.0827 dollars, which follows a fall of 0.4% as investors weighed up the consequences of a French parliament without a majority. Between the two rounds of the French parliamentary elections, the EURUSD had surged. Despite a landslide victory for the Rassemblement National (RN) and the Nouveau Front Populaire (NFP), the far-right and ‘all-left’ (including the extreme) parties respectively, the markets were nonetheless anticipating the likely absence of an absolute majority for either of these two parties.
In addition, President Emmanuel Macron’s centre-ground party performed better than the pollsters had anticipated, limiting the number of seats won by the left and making the NFP’s political line less likely to be adopted in its entirety. One factor of uncertainty certainly remains, but to a lesser extent.
Analysts believe that the markets are likely to be relieved that the far-right Rassemblement National came third after winning the first round. However, investors fear that the advances of the French left could undermine many of President Emmanuel Macron’s market-friendly reforms. They also believe that the political stalemate could put an end to attempts to control France’s debt, which stood at 110.6% of gross domestic product (GDP) in 2023.
“The Left’s economic programme is in many ways much more problematic than the Right’s, and even if the Left will not be able to govern on its own, the outlook for French public finances deteriorates further with these results,” said Jan von Gerich, chief market analyst at Nordea.
It’s ironic to note that the absence of a likely majority initially played in the euro’s favor, only to endanger it today. One cause, two diametrically opposed effects just a few days apart. So, as far as the markets are concerned, everything’s a matter of interpretation and mindset.
If the drop in the world’s leading pair EURUSD remains however contained, it is also due to the fact that the dollar held back after the release of US employment figures on Friday, which reinforced the prospect of the Federal Reserve cutting interest rates in the autumn. According to CME Group’s FedWatch tool, more than 75% of traders believe that the Fed will cut rates at its September meeting.
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