In a surprising move following the defeat of Macron’s Renaissance Party in the European Parliament elections, French President Emmanuel Macron called for early legislative elections, initially scheduled for 2027. This unexpected decision has sent shockwaves through the financial markets, particularly due to the strong performance of the far-right National Rally (RN) in the EP elections.

Political Context and Market Reactions

The snap elections aim to position Macron’s allies favorably for the 2027 presidential election. Macron appears to believe that the far-right’s potential governance failures could diminish its appeal among voters. However, Marine Le Pen’s RN is likely to increase its seats in the National Assembly. Currently projected to win the most votes in the first round, the RN faces stiff competition from the leftist New Popular Front (NPF), making an absolute majority unlikely and a hung parliament a strong possibility.

This uncertainty has created a volatile trading environment. Since the elections were announced, EUR/USD has underperformed, the CAC 40 index has dropped sharply, and the spread between French and German government bonds has widened.

French Voting System Explained

France will choose the 577 members of the National Assembly through elections on June 30th and July 7th. The French voting system, similar to that of the US and UK, features single-member constituencies but includes notable differences:

  • A runoff election is held if no candidate wins a majority of the vote and a quarter of registered voters in the first round.
  • The runoff includes the second-place candidate and all other candidates who won 12.5% of registered voters.

Main Electoral Blocs

  1. Centre – Ensemble (ENS)
  2. Leader: Emmanuel Macron
  3. Policy: Pro-business, pro-European policies, raising the retirement age to 64.
  4. Expected Share of the Vote: Polling at 18-20%, projected to secure 70-155 seats (down from 248).
  • Right Wing – National Rally (RN)
  • Leader: Marine Le Pen
  • Policy: Anti-immigration, large-scale tax cuts, confrontational EU stance, potential reduction in Ukraine support.
  • Expected Share of the Vote: Major gains expected, with support in the mid-30s.
  • Left Wing – New Popular Front (NPF)
  • Leaders: Jean-Luc Melenchon (LFI), Olivier Faure (PS), Marine Tondelier (LE), Fabien Roussel (PCF)
  • Policy: Lowering the retirement age to 62, increasing minimum wage, higher taxes on the wealthy, increased green energy investment.
  • Expected Share of the Vote: Expected to gain 27-30% of the vote.

Potential Election Scenarios and Market Impact

  1. No Majority, Weak Ensemble

Likely formation of a coalition on the left or right, leading to compromises and retention of the status quo. Neutral market impact.

  • No Majority, Strong Ensemble

Potential for a technocratic cohabitation government or a minority government led by Ensemble. Positive signal for French assets and the euro.

  • National Rally Majority

Markets may react negatively, although less so than a left-wing victory. Expect weakening of the euro and French assets.

  • New Popular Front Majority

The most negative scenario for French equity markets and the euro. Expect a large sell-off in the common currency due to expansionary fiscal policy and increased taxation on the wealthy.

The upcoming snap elections in France have introduced significant uncertainty into the financial markets. The outcome could greatly impact the euro and French assets, depending on which political bloc gains power.

For businesses and investors, staying informed and prepared for various scenarios is crucial.

At Capex Currency, we can help you navigate these volatile times with tailored FX strategies to safeguard your bottom line.

Contact us to learn more about our services and how we can assist you in managing currency risks.