Markets Cautious on French Hung Parliament

The victory of the hard left in the recent French elections has left markets questioning what will happen next.

Future Uncertainty

Markets showed concern that the hard right could win the second round of parliamentary voting in France. Nonetheless, the hard left's victory did not provide much solace either, as prediction markets and opinion polls were inaccurate in forecasting the outcome. Markets dislike uncertainty, especially since the result introduces new risks. The President of France cannot call snap elections for another year. Germany's general election is also scheduled for 2025, which may prove more important for the Euro and European markets. If the French election proved anything, opinion surveys are not the best choice for traders to preposition ahead of future results.
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Contrary to predictions, the hard left gained the most seats in the French Parliament, followed by the centrist pro-Macron coalition, leaving the far right third. The leftist coalition, the New Popular Front, did not secure a majority. Despite the hung parliament, the left is calling for the resignation of the Prime Minister as it intends to form a government. With the three main political groups at odds, the results suggest negotiations will be difficult and potentially stall legislative progress. As a result, analysts expect another election to be held as soon as legally possible.

Cautious Reaction

The initial market reaction was fairly muted as traders analysed what a hung parliament could mean for inflation pressures across the economic bloc. Stock markets opened lower but quickly recovered, with the French CAC performing relatively well, led by banks. Uncertainty around who will form a government and what policies may be enacted left a general wait-and-see approach, and the index gave back its gains by the close.

While Macron's centrist party faced challenges from right- and left-wing candidates who advocated more spending, the potential for policy gridlock eased concerns about inflation. Still, broad public support for more interventionist stances prevented stock prices from fully recovering recent losses incurred since the election call. The key issue of France's struggling to address its growing fiscal debt and potential for increased spending to spark higher inflation across the Eurozone remains dependent on the outcome of upcoming government and coalition negotiations in the coming days, weeks, or possibly months.

EURUSD Remains in Triangle Range

EURUSD ended the session mixed on Monday but held above the $1.08 support. Having recorded several consecutive wins recently, failing to get through the upper triangle trendline near $1.09 may lead to a pullback to $1.0748, exposing $10665 and $1.06. In the unlikely scenario that bulls exit the triangle, the next resistance past 1.0985 lies at 1.1145.

Source: SpreadEx / EURUSD

Key Takeaways

The surprise victory of the hard left in the recent French elections left markets uncertain about the future, introducing new risks for traders lacking clarity. Contrary to predictions, the hard left gained the most seats, followed by Macron's centrists and the far-right third. No group secured a majority, potentially stalling progress with a hung parliament. Markets initially reacted cautiously as traders analysed what a hung parliament means for Eurozone inflation, with stock markets opening lower but recovering and French banks faring relatively well. However, uncertainty over the incoming government and policies left traders in a wait-and-see stance dependent on upcoming negotiations.