Markets on edge as French vote does little to dispel uncertainty

Politics continues to take font and centre in financial markets, with votes in the UK and France to be closely watched this week.



Euro posts modest gains as hung parliament likely after French 1st round elections.

National Rally wins most votes, but seen falling short of absolute majority.

Poor Biden debate showing boosts Trump’s re-election bid.

Big Labour majority seen at Thursday’s UK election.

JPY hits new lows, despite intervention speculation.

AUD rallies after strong CPI data.


Sunday’s first round of the French assembly elections was won by Le Pen’s National Rally, with Melenchon’s leftist front a good second and Macron’s centrist party a poor third. It remains unclear whether the far-right will obtain an absolute majority in the second round, although early indications suggest that it will fall short. The euro rallied modestly in Asian trading, as the outcome of the first round was largely in line with polls and market expectations – perhaps on relief that the left front failed to outperform the polls. The other political flashpoint was in the US, where Biden’s disastrous debate performance has made Trump the clear frontrunner in November’s election, though financial markets are taking this outcome in stride.

Politics will remain the focus for investors. Political jockeying in France ahead of Sunday’s second round, the possibility that Biden will withdraw from the US presidential contest, and the UK general election (Thursday) could bring about some major volatility. As if this wasn’t enough, Eurozone inflation comes out on Tuesday and the US June labour market report is published on Friday, in a week in which the US 4th of July holiday will drain liquidity from international markets. It could be a bumpy ride.



The tilt towards Trump in the polls after last week’s debate and Biden’s catastrophic performance should have had a positive effect on the dollar, as markets price in a more protectionist administration that favour the US’s interests over that of the rest of the world. The greenback’s failure to rally significantly against most world currencies after the event is perhaps an indication of how expensive it has become at current levels.

In addition to the political front, a slew of labour data culminating in the June payrolls report on Friday will give us a critical read on the apparent slowdown in the labour market and the prospects for Federal Reserve cuts for the rest of the year. With less than two cuts priced in during the remainder of 2024, and the dollar trading at very high levels, there is little room for disappointment, we think.



The euro is trading slightly higher against most currencies compared to Friday close, with the reaction in bond markets also relatively contained, as investors greet Sunday’s French election results in a mildly positive fashion. While Len Pen’s National Rally obtained the most votes, this is unlikely to be enough to allow for a majority in the second round. Both the removal of the left-wing majority scenario, and the likelihood of a hung parliament, could be bullish for the common currency, as markets price in tax and immigration policies that more closely resemble the status quo.

In addition to the political headlines, this week will also be busy on the economic and policy fronts with the flash inflation report for June and the minutes of the ECB June meeting published on Tuesday and Thursday respectively. Brace for volatility.

Of the three political fronts open this week, the UK is the least uncertain one. Every poll agrees that Labour will win a large majority. We expect sterling to be impacted by the secondary ramifications of the vote. A very large Labour majority could be a modest positive, as markets see a smaller political risk premium attached to the pound, on hopes of closer ties to the European Union. A Reform Party outperformance could have the opposite effect, although Nigel Farage’s party is seen obtaining only a handful of seats. See our UK election preview report for more of our thoughts.

A slew of second-tier macroeconomic releases will probably be largely ignored by traders, which remain more focused on political headlines.