EUR JPY braces for French election 1st round

The long-awaited French presidential election kicks off on Sunday, pitting four main adversaries against each other in a heated first-round battle. The four primary candidates span the political spectrum, but the market impacts of their successes or failures on Sunday will be tied indelibly to their policy stances on French participation in the European Union and euro currency.

One of the key potential market impacts to watch for after the votes are counted will be the effect on EUR/JPY. This currency pair combines the shared currency of the euro area, which potentially stands to lose or gain the most from the election outcome, along with the safe-haven yen, which often acts as a barometer of market risk perceptions.

Polls

The latest poll averages for the first round of the election continue to show a close race. Centrist Emmanuel Macron, who is considered pro-EU and pro-euro, has extended his persistent lead to near 24%. Far-right Marine Le Pen, who is seen as the candidate most aggressively opposed to French membership in the EU, is the second most favored to advance to the final round at around 22%. Conservative Francois Fillon and far-left Jean-Luc Melenchon, another staunch EU critic, are nearly tied at around 19% each.

Paris Attack

On Thursday night, an alleged terror attack that resulted in the death of a French police officer on the Champs-Elysees in Paris led Marine Le Pen to call for all terror suspects to be expelled from France. This last-minute tragic event before Sunday’s vote could potentially make a significant impact on Le Pen’s chances.

1st Round Scenarios

There are six possible scenarios for the advancement of two candidates among the four main rivals. Currently, the most likely scenario is that Macron and Le Pen advance. Since this is what polls are now showing, the impact of this outcome on the euro may well be priced-in already and therefore muted, but could also have somewhat of a negative effect. In the event of a Macron/Fillon win, the euro impact would likely be significantly positive, as Le Pen’s and Melenchon’s EU threats will have been neutralized. Macron/Melenchon would likely have a similar effect with the Macron/Le Pen scenario. Le Pen/Fillon could have somewhat of a negative euro impact in the absence of the pro-EU Macron. But the most negative outcome of all for the euro would likely be Le Pen/Melenchon, both anti-EU candidates, as the future of French membership in the EU would then be severely jeopardized.

EUR/JPY

In the midst of all this speculation, EUR/JPY is likely to be impacted significantly. The past month has seen the currency pair fall sharply, but this week has seen a modest rebound. Overall, EUR/JPY is entrenched in a long-term downtrend. From a technical perspective, the pair has just turned down after retesting a key uptrend line that was broken down early last week. After Sunday’s first-round election, any negative outcome for the euro may be combined with a boost for the safe-haven yen, which could pressure EUR/JPY back down towards 115.00 support and lower. To the upside, a positive outcome for the euro could push EUR/JPY towards intermediate resistance around the 118.00 level.