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Jun 10 - 02:55 PM

SocGen: EUR/USD Outlook Ahead of French Elections

By eFXdata  —  Jun 10 - 01:30 PM

Synopsis:

SocGen analyzes the potential impact of the upcoming French elections on the EUR/USD exchange rate. The announcement by President Macron to dissolve Parliament and call for fresh elections following the strong performance of far-right parties has already affected bond spreads. The analysis suggests further volatility in EUR/USD depending on the election outcomes.

Key Points:

  1. Historical Context of Bond Spreads:

    • Between 2010 and the height of the European sovereign crisis in 2011, the OAT-Bund spread widened significantly from under 20bp to almost 2%.
    • Italian spreads increased from under 1% to over 5%, prompting Mario Draghi's intervention.
  2. Current Spread Movements:

    • OAT spreads have been in the range of 40-70bp for the last three years.
    • President Macron's decision to dissolve Parliament and call for new elections has led to a spread movement from 45bp to 55bp, which is not yet at crisis levels.
  3. Potential Election Impact:

    • The far-right Rassemblement National party's potential to win a majority in Parliament could trigger further market reactions.
    • A win for Rassemblement National would likely cause EUR/USD to re-test and possibly break the 1.06 level reached in mid-April.
    • The first-round election results are due on June 30, with the second round concluding on July 7, post the next US jobs report.

Conclusion:

The upcoming French elections introduce significant uncertainty to the EUR/USD exchange rate. While the current movements in bond spreads are not yet at crisis levels, a majority win for the far-right Rassemblement National party could lead to a substantial depreciation of the euro against the dollar

Source:
Société Générale Research/Market Commentary

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