By Yoruk Bahceli and Amanda Cooper
LONDON (Reuters) – The euro hit a 10-day high on Sunday after the first round of a surprise snap election in France put the far-right in first place but provided little clarity on the final outcome, leaving investors braced for more volatility.
Marine Le Pen’s National Rally party advanced in the first round, confirming expectations, although analysts indicated that her party won a smaller share of the vote than some opinion polls initially expected.
But uncertainty reigned, with the final outcome dependent on how parties decide to join forces in each of the country’s 577 electoral districts for the second round, setting the stage for days of haggling ahead of next Sunday’s runoff.
One poll showed that the Republican Party could win an absolute majority.
The euro, which has fallen 0.8% since President Emmanuel Macron called the election for June 9, rose 0.3% to $1.0749, its highest since June 20, as the Asia-Pacific trading session got underway on Monday, according to LSEG data.
“I think it was a case of, ‘Well, there were no surprises,’ so there was a sense of relief,” said Fiona Cincotta, senior markets analyst at City Index. “Le Pen’s margin was a little smaller than some polls indicated, which may It helps the euro rise a little at the open.”
The shock vote shook markets, with the far right, as well as the left-wing coalition that came in second place on Sunday, pledging a significant increase in spending. Investors were concerned, given France’s already high budget deficit, which prompted the European Union to recommend disciplinary steps.
Last week, demand from senior bondholders to hold French debt over German debt rose to the highest level since 2012, during the eurozone debt crisis.
Shares of its three biggest banks fell 9-14%, dragging down the Paris stock index by around 7%.
Attention will shift to bond and stock markets when they open for European trading on Monday. Analysts expect a slight recovery in French bonds.
“We are struggling to see a meaningful and sustainable recovery,” said Peter Goffs, head of developed markets debt research at MFS Investment Management.
Markets calmed after the initial turmoil following the election announcement, as the National Front party softened some of its more radical plans and said it would respect European Union fiscal rules requiring France to cut its deficit, but they were dealt another blow on Friday.
No rest
Markets are expected to remain volatile, given the great uncertainty about next week’s final results.
Much depends on political deal-making. The candidates have until Tuesday evening in the runoff to decide whether to step down or run.
Jean-Luc Mélenchon, leader of the France Unbowed party, said the left-wing alliance would withdraw candidates who come in third on Sunday from the runoff.
If the coalitions aimed at preventing the National Front from taking power start to look credible, French bonds could recover, said Kathleen Brooks, director of research at trading platform XTB.
Adding to the uncertainty, Sunday’s high turnout suggests France is heading for a record number of three-way runoffs — from which the National Front is expected to benefit far more than two-way contests.
“Markets are looking forward to another week of high uncertainty,” said Carsten Brzeski, head of global macroeconomics at ING. “Perhaps out of fear, the Conservatives could still secure an absolute majority next week.”