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EUR: Markets continue to assess the outcome of the French elections – ING

A hung parliament was widely expected in France, but the surprise victory of the left-wing coalition may cause concern in markets ahead of coalition talks. Still, the fact that Macron’s party came in second may offer some balance and limit the widening of French bond spreads. The Euro (EUR) should continue to lag in our view. In the US, Powell and CPI are the highlights this week, notes Francesco Pesole, FX analyst at ING.

Markets seem more comfortable with the far right than with the far left

“The second round of parliamentary elections in France produced a surprise result, a hung parliament and two main scenarios: difficult coalition talks or a technocratic government. The positive market reaction after the first round indicated that investors were more comfortable with the far right than with the far left, which is perceived as a greater danger to France’s already fragile fiscal position.”

“Those fiscal concerns are likely behind the euro trading around 0.2% below its Friday close of 1.0820 after testing 1.0800 last night. From a currency perspective, there are lingering risks to the euro going forward, and we continue to view the shared currency as a likely laggard in the G10 space in an environment that may still support pro-cyclical currencies given softening US data.”

“The absence of market-moving data releases in the Eurozone this week and the European Central Bank about to enter the silent period ahead of its meeting on July 18 will contribute to the focus in the coming days on French political developments. We believe EUR/USD may trade below 1.08 on that before US macroeconomic developments take over.”

Source: Fx Street

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