Euro still resilient despite looming French election risk

With just three days before the potentially pivotal first round of the heated French presidential election on Sunday, April 23rd, a resilient euro appears rather oblivious to the risks imposed by the two fiercely anti-EU candidates – Marine Le Pen and Jean-Luc Melenchon. This may be partly due to the narrowly higher poll-standings of centrist candidate Emmanuel Macron, who has portrayed himself as a strong supporter of French participation in the European Union and euro currency.

Macron is the only candidate of the four current front-runners to embrace the EU/euro without prominently calling for reforms. Far-right Le Pen is the strongest advocate for France leaving both the EU (Frexit) and euro. Far-left Melenchon would also support Frexit if sweeping EU reforms are not implemented. And while conservative Francois Fillon does not advocate an end to EU membership, he has promised reforms to both EU policies and the euro.

Despite Macron’s modest but sustained dominance in French polls, the race could realistically go to any one of the candidates. Recent polls of voters have shown an exceptionally tight race, with each of the four front-runners fluctuating not far from 20%. Most recent national poll averages have Emmanuel Macron around 23%, Marine Le Pen around 22%, and both Francois Fillon and Jean-Luc Melenchon fighting for third-place around 19%. Furthermore, there is still a sizable contingent of undecided voters, as well as many who could easily change their votes.

When such tight polling conditions so close to the election are combined with the fact that polls have been notoriously inaccurate in recent times (e.g., last year’s UK Brexit referendum and US presidential election), a clear case can be made that it remains anyone’s election to win.

After the first round of the election, the two leading contenders will move onto the second round, set for May 7th. This is provided, of course, that none of the candidates secures 50% of the first-round votes, which has never occurred in French elections. With such a close race among the four front-runners currently, this is even less likely to happen.

In the run-up to this weekend’s first round, the euro has recently exhibited resilience against both the stumbling US dollar and Japanese yen. A key currency pair to watch amid the election risks in the days and weeks ahead will be EUR/JPY. In the event of better results than expected from either Le Pen or Melenchon, EUR/JPY could be doubly pressured by both a drop in the threatened euro as well as a boost for the safe-haven yen as a result of heightened market risk perceptions. In the slightly more likely event that Macron, or to a lesser extent, Fillon, move significantly ahead, the euro is likely to experience a further relief rally while the yen could drop on decreased safe-haven demand. This could result in a pronounced boost for EUR/JPY as European markets potentially breathe a collective sigh of relief.