- French President Emmanuel Macron faces a tough reelection campaign.
- A victory for far-right candidate Marine Le Pen would crash the euro.
- EUR/USD is struggling, partly in due to a re-estimation of Le Pen's chances.
- A victory for Macron would boost the euro.
Once bitten, twice shy – Investors are still licking the wounds from Brexit, Russia's invasion of Ukraine and other improbable events that became reality. A low-chance event carries big risks, and markets seem unwilling to take any – but with the French elections, they may have gone too far.
Background
France is the eurozone's second-largest economy, the only member with nuclear arms and after German Chancellor Angela Merkel's departure, the old continent's leading pro-integration force. Incumbent President Emmanuel Macron has been a champion of "more Europe" and a victory for his far-right rival Marine Le Pen – who supported "Frexit" in the past – would be a nightmare for the project. It would also devastate the euro.
France's economy is over one-sixth for the full 27-member bloc:
Source: Eurostat
The young, energetic and well-educated leader at the Elysee Palace suffers from an image of being a president only for the rich, which is exacerbated by rising costs and plan to cut pensions. His rival has moderated her anti-immigration and anti-European stances, focusing on bread-and-butter issues and gaining more votes.
The vote on April 24 will be the pair's second encounter. Back in 2017, mainstream parties and the public united behind Macron, leading to a 66% victory for the centrist that seemed to come from nowhere. This time, he is no longer the new guy, but rather the one overseeing the handling of covid, war, economy and many other issues – with some managed better than others. It is a referendum on the incumbent, and inherently pessimistic France may vote him out.
Nevertheless, despite the incumbent's woes and Le Pen's moderation, he still leads the polls. Her campaign materials included a picture with Russian President Vladimir Putin, and her condemnation of the war has a limited mitigating effect. Moreover, Macron's active campaigning has helped him shore up left-leaning voters, who prefer a capitalist that champions human rights over a populist who is tough on them.
As this "poll of the polls" shows, Macron is en route to win 54% of the vote, beating Le Pen by 8 points – and that gap is widening, not narrowing. The magazine gives him 87% chance of winning reelection.
Source: The Economist
Three scenarios
While a broad share of support for the far-right would provoke soul-searching in Europe, it would be enough for markets to stage a relief rally. As mentioned in the outset, investors are far from fully pricing in a return of the pro-market leader of one of Europe's most important countries.
1) Easy Macron win: In case Macron wins easily as described here, EUR/USD would rise, breaking one or perhaps two resistance lines if other factors also align. As results are due out on Sunday before markets open, the pair would open the new week with a gap, that would likely hold throughout Monday until other factors come along. High probability.
2) Tight race: If exit polls show a gap of less than 5% between both candidates, EUR/USD could open lower, perhaps losing one support line, as investors would price the chance of Le Pen prevailing. The mix of uncertainty and low volume during the Asian session would trigger extreme volatility, shaking the common currency until the result is clear. Medium probability.
3) Le Pen win: If the far-right candidate ascends to the Elysee, it would be a major shock, no matter the market's cautious pricing. EUR/USD would tumble three or four support lines, and could drag down other currency pairs such as GBP/USD. Worsening French-British relations would weigh on both currencies. Such a scenario would likely play out only in the early hours of Monday rather than in exit polls on Sunday. Low probability.
Final Thoughts
While a Le Pen presidency would have profound political and economical implications, the probability is low – similar to a Trump victory in 2020 rather than 2016 – and Macron will likely prevail. Five more years of economic liberalism in one of the Western world's more protective countries would be market-friendly and boost the euro.