This article was written by Ipek Ozkardeskaya, Senior Market Analyst at FCA regulated broker London Capital Group Holdings plc (LON:LCG).
The first round of the French election, due on April 23rd, is expected to be a tight race between four major candidates: Marine Le Pen (Front National), François Fillon (UMP), Emmanuel Macron (independent) and Jean-Luc Mélenchon (Socialist Party).
The far-right candidate Marine Le Pen is one of the favourites, as she has surfed on a rising wave of European populism over the past years. According to aggregated polls published by Bloomberg, she may win the first round with 22% probability. Thursday’s terrorist attack in Paris could indeed butter Le Pen’s bread by reviving fear and the sentiment of insecurity.
François Fillon, which was the favourite candidate before a scandal revealing that her wife was paid €900’000 of public money for little-to-no work, recovered to 20% after falling to 18% a month earlier.
The late and surprise rise of the far-left candidate, Jean-Luc Mélenchon, presently places him on the fourth position with 19% chances of attending the second tour.
Lately, Fillon’s return to the presidential race and Mélenchon’s unexpected surge have been weighing on Emmanuel Macron’s chances of attending the second tour. The odds for Macron retreated from 26% to 23% since the beginning of March.
Although Mélenchon gave a quick squeeze to the pre-election balance, the pricing in the markets suggest that his chances to reach the second tour are rather meagre.
On the other hand, it is true that Le Pen made a big noise on the run up to the elections. Even big banks held strategy meetings with the anti-European candidate in order to prepare themselves to an eventual Le Pen rule. However, we wonder whether Le Pen victory is overpriced. One thing is sure, the market will rather be surprised if she didn’t make her way to the second tour.
Hence, the major question is who, between Francois Fillon and Emmanuel Macron, will be racing against Le Pen?
Macron could be penalized due to ‘political immaturity’
Emmanuel Macron has made an almost faultless election campaign and gave a fresh hope to many undecided citizens. Nevertheless, two factors play against him. First, he is an independent candidate. Second, he lacks a proven track record in politics. Although he has been backed by Francois Bayrou (President of the Democratic Movement Party), he is subject to many critics for his lack of experience. Alain Juppé, who renounced to the race on March 7th, criticized Macron saying that ‘he tries to incarnate the renewal, but his political immaturity and the weakness of his project could be a disillusion’.
In opposition, François Fillon has an outstanding experience in French and European politics and is certainly strong enough to deal with the times of political and economic uncertainties at the heart of the European Union and the Eurozone.
Le Pen is not the favourite candidate of the final tour
Le Pen versus Fillon or Macron
The general consensus is that the candidate who will fight Marine Le has circa 60% chances of paving his way to the Elysée Palace on the second and the final tour of the election, due on May 7th.
In this scenario, we expect a relief rally in the euro and the European shares on Monday. The EURUSD could extend gains toward the 2017 highs, yet bump into resistance pre-1.10 mark.
Fillon versus Macron
The big surprise would be a duel between Francois Fillon and Emmanuel Macron. In terms of uncertainty, an eventual Fillon-Macron clash should increase the volatility in the euro.
Yet, given that none of the two candidates has planned to overhaul the EU, or step out the economic and the monetary union, a Fillon-Macron outcome should be positive for the euro. The EURUSD could surpass the 2017 high of 1.0907 and attempt to take over the 1.10 level.
Le Pen versus Mélenchon
The most bearish scenario for the markets is certainly a Le Pen – Mélenchon final. The latter scenario is given low probability. Indeed, France is hardly seen favouring two extreme-end candidates. Nevertheless, if realized, an eventual Le Pen – Mélenchon duel would place the euro under a fundamental selling pressure.
The EURUSD could reverse gains and target the 1.05/1.03 area on rising probability of Frexit from the EU, and/or the Eurozone.
Mélenchon versus Fillon or Macron
This scenario has been barely discussed. It is difficult to predict how Jena-Luc Mélenchon would perform if he is brought to fight back Fillon or Macron at the second tour.
Mr. Mélenchon, who is given a low chance to outperform in the first tour could, according to some, gather a solid momentum in the second tour. Therefore, the latter outcome should hint at a decent rise in the market volatility and weigh on the single currency. The EURUSD could ease toward the 1.05 mark, yet should not be fully handed into the bears’ hands.