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Concerns of Le Pen Victory Forecast to Hammer Euro Long-Term

The prospect of a victory in the French Presidential elections for far-right candidate Marine Le Pen continues to weigh on Euro exchange rates today.

EUR GBP is down -0.1%, EUR USD down -0.4% and EUR AUD down -0.5% as investors drop the common currency in favour of safer-havens.

Investor caution is also evident in the bond market, where French yields continue to rise and German two-year yields have dropped to their lowest recorded negative level.

Euro weakness comes despite a run of positive data. German Ifo business survey scores have improved above forecast, with the business climate index rising to 111.0, the current assessment index climbing to 118.4 and the expectations index clocking in at 104.0.

Italian inflation data has also bettered estimates, clocking in at 0.3% on the month and 1% on the year thanks to upward revisions to previous figures.

The common currency weakening in spite of support from domestic ecostats is a continuation of yesterday’s trend, suggesting the Euro is going to become increasingly decoupled from domestic data until the largest political threats hovering over the Eurozone either materialise or are banished. Even the resolution of the latest Greek debt crisis, with Athens agreeing to new austerity measures being triggered if targets are not met, failed to give the Euro much of a boost.

Yesterday’s Markit PMIs had shown that economic growth in the Eurozone hit its fastest pace in nearly six years during February. Job creation hit a nine-and-a-half-year best, while a strong recovery in France saw growth there outpace that of Germany; the Eurozone’s powerhouse economy.

Yet the Euro weakened as investors focussed on the threat of rising populism in the currency bloc. French Presidential candidate Marine Le Pen has claimed she will reinstate the Franc, pulling France from the currency union. This could trigger the collapse of the Eurozone.

If fears over the election results – still over ten weeks away – are already undermining the Euro, it seems likely the common currency will continue to feel the drag from political concerns over the coming months.

Le Pen has seen her popularity rising significantly in recent polls; helped immensely by scandals surrounding centre-right candidate Francois Fillon. Fillon is alleged to have paid his wife and two of his children a combined €900,000 for work they did not carry out. He is currently being investigated by the authorities and has therefore broken his campaign pledge to withdraw from the race should this happen.

Experts had for some time expected that Le Pen would make it through the first round of voting on April 23rd, only to lose to Fillon in the second round on May 7th. However, the falling popularity of her rival and her increasingly strong polling figures have shaken belief that the far-right will fall at the final hurdle.

Investors are preparing for a big shock come May. The results of the UK’s EU referendum and the US Presidential election appear to be weighing on the minds of traders, who are keen to avoid the overconfidence that set the markets up for a huge fall on those occasions.

The outlook for the Euro therefore looks soft.