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EUR/USD moved up on the French election result taking the view that the Far Right not winning is bullish but this view is misplaced in our view – we expect any euro upside to be minimal and a big move to the downside to unfold...

We view the French elections as bearish, the economy is weak and the ECB will cut rates more than expected which points to a lower euro first the Frech elections

French Elections Impact on the Euro

“A shock election win for France's leftist alliance has reinforced wariness among investors who had already braced for the risk of political deadlock and a policy paralysis that's unlikely to improve the country's creaking public finances.” (Reuters)

From a fiscal point of view, the Left is as bad if not worse than the Right for French finances but the market for is relaxed. The risk premium, or spread, for holding France's debt over Germany's was at 65 basis points and remains below the 12-year high in June at 85 bps. In terms of euro volatility its dropped to lower levels than before the elections

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The problem ahead is in terms of forming a Government President Macron is highly unlikely to give the divisive controversial Mélenchon the job as Prime Minister.

“While tradition dictates that the largest party in parliament (in this case, the left-wing NFP coalition) proposes a prime minister, Macron is not obligated to pursue such an option,” (Antonio Barroso Teneo)

Mélenchon has said the new prime minister should hail from NFP. However, the NFP has no leader, and the parties forming the coalition are heavily divided on whom they could select.

Mélenchon — who in the past has praised late Venezuelan dictator Hugo Chavez, said he’d take France out of the NATO alliance and muted the idea of a 100% tax rate on France’s wealthy citizens is hardly a figure Macron will choose.

Let's see how forming a Government works out – this view has come to fruition:

"I am trying to give France the appearance of a solid, firm, confident and expanding country, while it is a worn-out nation... The whole thing is a perpetual illusion." (French President Charles de Gaulle when forming the Fifth Republic)

The two-tier voting system was put in place to stop the communists from gaining power in the 50s and 60s but was eventually going to create chaos and uncertainty when you dont have tweo clearly opposing groups which we have now with 3 groups where two can't find common ground.

With France lacking leadership with debts over 100% of GDP we have a scenario where investors could lose confidence if the deadlock continues. On question that comes to mind is why was France given so much leeway in terms of debt? As former EU President Jean Claude Junker noted "Because its France" I.E. one rule for Greece another for France...

A slowing Economy and More Rate Cuts Coming

Aside from political problems the economy it's struggling we can see this in the economic surprises below where data continues to miss forecasts...

economic downside

The USD has the yield advantage now and we expect it to widen going forward – the US has a stronger economy than the US and inflation is more stubborn We see the euro as a long term sell

Technical Analysis

Our view of the key levels of support and resistance to look out for are below

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