The pound was lower against the euro, as the single currency strengthened following Emmanuel Macron’s lead in the first round of the French presidential elections. In two weeks, markets will be focused on the second round, where Macron will have a close run-off with far-right leader Marine Le Pen. Both NATO and the European Union will be anxious to see what will happen in two weeks especially after Le Pen has qualified for the second round of the French presidential on the 24th of April. Investors will also be cautious and concerned about the outcome as a far-right president will have a negative impact on markets and the euro in particular. Le Pen’s anti-EU sentiment and admiration of Russian President Vladimir Putin are some of the main risks. 

Yesterday, the French president Emmanuel Macron won 27.6 percent of the vote with his rival Le Pen getting 23.4 percent of the vote. This is Le Pen’s third appearance in the first round of a presidential election. While polling suggests Macron will retain presidency in two weeks, the clash with Le Pen will be very close.

Europe and Washington eyeing French elections

The narrowing poll predictions suggest that Europe and Washington will be closely watching the campaign in the coming days, as allies would want to see whether Paris will remain a partner in the war against Russia in Ukraine. Investors will closely watch the upcoming debate on the 20th of April where Le Pen will try to project a more sophisticated and smoother image.

Despite her condemnation of the war in Ukraine, there are concerns about Le Pen who has had relations with Russia and received party loans from a Russian bank. In regards to NATO, she has openly stated her desire to pull the EU’s only nuclear power out of the alliance’s integrated command structure “so as to be no longer caught up in conflicts that are not ours.” If she wins in the presidential elections, she also poses risks to the European Union. Her party, the National Rally, may have removed its proposal to leave the EU, the free-movement Schengen zone and the euro, but she remains a Eurosceptic and has plans to reduce contributions to the EU and promote a coalition with like-minded politicians from Hungary and Poland.

She has also been accused that she plans a “Frexit” as some of her campaign proposals contradict the EU’s free movement principles, including her interest in renegotiating the agreement on the Schengen area and replacing it with simplified checks for EU citizens.

Euro concerns

The euro had underperformed on Friday due to the tightening in polls and proximity of the Sunday vote. Analysts noted that the currency market has not really assessed the risks for the euro, including the war in Ukraine, political uncertainty in France, and policy divergence between the ECB and the Fed, as the latter is expected to raise rates faster and more aggressively.

Some analysts have said that, with Le Pen not looking to take France out of the EU, her threat is minimised, and any anxiety related to the election won’t have a massive effect on the euro.

Others have warned that if she wins, she will isolate France from the rest of the EU, as she seeks to cut EU budget contributions and renegotiate agreements.

While the dangers for the currency market might be lower than those in 2017, this year’s election still remains crucial. With the war in Ukraine and the energy crisis, a far-right government would lead to the market lowering its expectations for further integration and a possible coordinated fiscal response to the energy crisis and will eventually weaken the euro.

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