The market is momentarily setting aside macroeconomic data and central bank decisions as we enter the phase of parliamentary elections in France. Additionally, a similar event is scheduled in the United Kingdom at the beginning of July. Are we facing a political “earthquake”? Volatility in the euro, the pound, and European stock exchanges might increase next week. There is a real threat of significant declines in the indices from the Old Continent. We already saw a strong reaction following the results of the European Parliament elections on June 9th. Subsequently, there was a calming of the market. The French CAC40, after a rebound last week, might consider this week a loss. The quotations have matched the lows established on June 17th.
The French parliamentary elections will likely significantly alter the balance of power. The greatest crisis could be expected if the left-wing alliance wins, as the national budget would become even more uncertain, given that the promises of politicians from this faction might be realized. On the other hand, the dominance of right-wing populists could lead to conflicts at the European Union level. The debt crisis in this scenario would be less risky. The rise to power of right-wing groups would mean that politicians from this faction would want the next presidential elections (in three years) to be won by their representative.
The balance of power in the French parliament is likely to change significantly. According to polls, both right-wing populists and the left-wing “New People’s Front” will receive significantly more votes than in the last elections two years ago. Conversely, the parties that have supported President Macron’s policies in recent years will lose much popularity.
Due to the majority voting system, forecasts for the division of seats in parliament are very uncertain. However, it is highly probable that Macron’s camp will not have an absolute majority. The left-wing alliance also seems far from achieving such a result. On the other hand, there is a real chance that Le Pen’s National Rally will gain sufficient advantage.
Everything indicates that the election results in France will highlight the weaknesses of the monetary union. This is because, in many countries, the willingness to cooperate, which is necessary for the functioning of a monetary union without a political union, is increasingly being questioned. Additionally, both the National Rally and the People’s Front reject the new rules of the Stability Pact, which define how national fiscal policies should be coordinated. Its fundamental framework was created to ensure the stability of public finances, which in turn is a necessary condition for price stability as well as strong and sustainable economic growth.
It can be assumed that following the recent market reaction (euro decline, increase in French bond yields, stock index declines) to the results of the European Parliament elections and Macron’s surprising move, this time, volatility will also be elevated. There is a good chance that the euro will come under pressure, potentially causing the EUR/USD exchange rate to drop to around 1.06 or even lower. The CAC40 benchmark will react the most strongly. Its recent rebound was so weak that the last week saw the equalization of the course with the bottom established on June 17th. The current layout on the chart suggests a continuation of the downward movement. Perhaps the declines will lead quotations to the technical barrier around 7000 points, which is the upward trend line drawn through the lows of March 2020 and October 2022.
Łukasz Zembik, Oanda TMS Brokers
