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The euro strengthened following France’s snap election, with Marine Le Pen’s far-right National Rally (RN) emerging as the top contender in the first round, albeit by a narrower margin than anticipated.
This eased investor concerns over potential expansive fiscal policies that might have accompanied a more decisive RN victory.
Despite the RN’s strong performance, uncertainty remains before the crucial second round and could prompt caution among market participants regarding future political developments in France.
Consequently, the euro’s upside potential may be limited, as political uncertainty could undermine investor confidence, impacting the currency’s stability in the near term.
Concerns over fiscal policies, particularly amidst promises of increased spending from far-right and left-wing factions, have contributed to volatility in French bond markets. While French 10-year Government Bond Yields remained high, the spread with German yields decreased. However, bonds could remain exposed to the ongoing uncertainty in France.
Simultaneously, the US dollar weakened against a basket of currencies as speculation grew that the Federal Reserve might cut interest rates later this year. This sentiment was supported by recent data inflation in the United States coming in line with expectations, with the PCE Price Index rising 2.6% year-over-year in May.
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