A Report by CYS Global Remit Counterparty Sales & Alliance Unit
The European Parliament elections occur every five years to select representatives for the European Parliament, a crucial institution of the European Union (EU). These elections employ proportional representation, where a party’s seat allocation correlates directly with its vote share. With the most recent elections recently concluded on June 6 – 9, 2024, the results of the vote served as a barometer of prevailing political sentiments across the continent. While right-wing factions experienced success in certain regions, the political center maintained its ground.
Across the 27 EU member states, voters issued a stern warning to established political entities. This tumultuous expression of public sentiment significantly impacted French politics and, to a lesser extent, German politics, while also bolstering hard-line nationalist movements in various countries.
Market Uncertainty and Busy Week Ahead
The Euro declined on Monday following significant gains by the far-right in the European Parliament elections, prompting French President Emmanuel Macron to call a snap national election. This action added uncertainty to an already busy week for markets, with United States inflation data expected on Wednesday, coinciding with the Federal Reserve’s policy decision, and a Bank of Japan meeting on Friday. The Euro dropped 0.4% against the dollar, its weakest since May 9. Lee Hardman, a senior currency analyst at MUFG, noted that while the rise of right-wing parties was anticipated, Macron’s call for a snap election introduced unexpected market nervousness. This uncertainty caused the Euro, along with French stocks and bonds to plummet. French stocks fell by 1.6%, led by losses in banks like BNP Paribas and Societe Generale, making the CAC 40 the worst performer in Europe.
Holger Schmieding, Chief Economist at Berenberg, suggested this unexpected uncertainty could negatively impact markets. Kathleen Brooks of XTB highlighted that the ‘shock factor’ of Macron’s decision would affect European markets, but the outcome of the snap election would be more crucial.
Further Decline for the EUR/USD
EUR/USD suffered a blow on Monday as the winds of political uncertainty made a swift reappearance on the continent, encouraging further calls for more pain ahead for the single currency.
“We stick to our view that EUR/USD gets to 1.05 and lingers there in H2 2024”
Macquarie Group
This prediction came after the rightward shift in European parliamentary elections and Macron’s surprise snap election call heightened European Union political uncertainty. Ahead of the European Parliamentary results, Macquarie had warned that “gains for the populist right would augur fresh concerns about the political stability and unity of the European Union.” Adding fuel to the embers of political uncertainty, French President Emmanual Macron's decision for a snap election has been widely seen as a major gamble for his Ensemble party. The forthcoming National Assembly elections on June 30 and July 7 could see Macron’s coalition “lose some seats to the National Rally Party”, Macquarie adds, while his Ensemble party “certainly would not become a majority coalition.”
Historical Context and Market Pressure
The call for political uncertainty to weigh heavily on the Euro is supported by historical precedents. In 2017, the United Kingdom’s decision to leave the EU following the 2016 referendum sparked a wave of Euroscepticism, triggering concerns about the future of the European Union and pushing the Euro below parity against the Dollar.
“We expect some of the same pressure now too.”
Macquarie Group
Strength of the Dollar
Meanwhile, Dollar strength is also likely to keep a lid on the Euro, as the US Federal Reserve is expected to deliver a ‘hawkish’ pause on Wednesday by lowering its rate cut outlook to two cuts from three previously for this year. A hawkish Fed stance, at a time when their contemporaries have eased monetary policy, may bring into sharper relief the Fed’s relative ‘hawkishness’, and thus favor the USD. Overall, the Euro’s struggles highlight the broader geopolitical and economic challenges facing Europe, with political instability in France and rising Euroscepticism creating a volatile environment. Investors and analysts are closely watching the developments, with significant implications for the future of the Euro and the European Union’s economic stability.
Outlook for the Euro
The Euro’s recent decline underscores the fragility of Europe’s political and economic landscape. Political turmoil, combined with looming monetary policy decisions from major central banks, particularly the Federal Reserve, has placed additional pressure on the Euro. The unfolding political dynamics in Europe will continue to be a critical factor influencing market sentiment and the Euro’s trajectory in the months ahead.
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