Euro Rises as Le Pen’s Party Set for Smaller Victory Than Feared

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(Bloomberg) — The euro rose as traders digested signs that Marine Le Pen’s far-right party is poised to win the first round of France’s legislative elections by a narrower margin than some opinion polls had suggested.

The single currency rose 0.2% to $1.0740 in early trading in Sydney, the strongest since Tuesday.

Initial projections showed Le Pen’s far-right party ahead of President Emmanuel Macron’s centrist coalition and the leftist New Popular Front – but with fewer votes than it needs to secure an absolute majority after a second round of voting.

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The market was concerned that a very strong showing by Le Pen’s National Party would increase the chances of expansionary fiscal policy, highlighting the country’s sharply bloated fiscal accounts and further clouding the outlook for the single currency.

The focus now turns to whether her party can muster enough support in the second round of voting on July 7 to secure an absolute majority in the National Assembly, which would allow it to pass legislation more easily. President Macron and his other opponents are already devising strategies to keep the far-right party out of power.

“We now have a week of bargaining ahead of us,” said Joachim Clement, head of strategy, accounting and sustainability at Liberum Capital, who expects the euro to rise during the week as alliances are formed to limit Le Pen’s party gains. party.

What Bloomberg strategists say…

If the leftist coalition aims to “prevent the Le Pen group from obtaining a majority in the decisive second round,” this would have wide-ranging effects on the difference between France and Germany, and even on the euro. If the result is that we get a more centrist government, then This would be positive for the currency and herald a narrower spread.”

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— Vin Ram, Multi-Asset Strategist at MLIV

The National Rally was expected to get between 33% and 34.2% of the vote, according to initial projections from four pollsters on Sunday. A final Bloomberg poll of exit polls on Friday put it at 36.2%.

Projections on Sunday showed the left-wing alliance expected to get between 28.5% and 29.6% of the vote and Macron’s centrist alliance between 21.5% and 22.4%.

“A hung parliament could make it difficult to get anything done in France in the current parliament, which is exactly what the markets want,” said Kathleen Brooks, director of research at XTB.

Macron’s decision to call an early vote in early June threw markets into chaos.

His party, which supports deep spending cuts to rein in France’s budget deficit, suffered a crushing defeat in European parliamentary elections. Meanwhile, the National Rally has pushed some costly budget measures, including a cut in sales tax on energy and fuel.

Over the past two weeks, the premium investors demand to hold French 10-year bonds over safer German debt has risen to more than 80 basis points, levels last seen during the euro zone sovereign debt crisis. The euro has fallen to its lowest since early May.

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Financial pressures

While the spread on the 10-year U.S. Treasury note may find some relief as trading opens on Monday, it is difficult to see a “substantial and sustained bounce,” said Peter Goffs, head of developed country debt research at MFS Investment Management.

“The uncertainty is high, the French fundamentals have not changed and the final result is still unknown and unknowable with the large number of three-way competitions complicating matters,” he said.

At 5.3% of GDP this year, France’s budget deficit is already above the 3% of GDP allowed under European Union rules. The IMF expects that, in the absence of further measures, debt will rise to 112% of GDP in 2024, and increase by about 1.5 percentage points a year over the medium term.

French bond futures begin trading at 1:10 a.m. in London, followed by cash bonds at 7 a.m. and stocks at 8 a.m.

—With the assistance of Allegra Catelli.

(Updates with additional commentary.)

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