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France qualified for the semi-finals of the EuroCup, but that was not what was being celebrated at the Elysée Palace this weekend. It was the result of the second round of the legislative elections.
Against all odds, the right-wing coalition led by Marine Le Pen’s “Rassemblement Nationale” finished third with 143 seats, behind even the centrist presidential alliance.
First place went to the left-wing “New Popular Front” alliance, which won 182 parliamentary seats. It should be noted that the French parliament has a total of 577 seats.
After a simple math, it is clear that no coalition obtained an absolute majority, meaning it could take some time for Emmanuel Macron to form a government.
How did the markets react?
It was a volatile day for French government bonds, with rates hovering around 1.5%. Meanwhile, the EUR/USD chart looked more like a cardiogram.
Future movements will depend on progress in forming a government from parties with different views. Therefore, it could also be volatile.
In the meantime, it is essential to understand that the country’s financial situation remains precarious, with a debt of 110.6 percent of GDP and a budget deficit of 5.5 percent of GDP.
Still, the situation could have been worse if the right had won. Lowering the retirement age to 60 would have worsened the budget, forcing up borrowing costs.
Overall, the threat of political instability persists, and the formation of a government by unusual coalitions should be a cause for concern.
What lies ahead for the euro?
With the French elections behind us, investors’ attention will shift to Jerome Powell’s testimony before the Senate Banking Committee and the tone of his comments.
And, of course, there are CPI and PPI reports. If Powell maintains a dovish stance and inflation continues to ease, expectations of a rate cut in September could increase.
As a result, the US dollar could weaken further, while the euro could strengthen.
