Risk appetite starts to fade post-French elections, EUR/USD holds its gains

The relief in European markets following the unexpected result of the French elections has been short-lived. The surprise result showed Marine Le Pen’s far-right party shoved down to third place, with a coalition of left parties taking the bigger share of the votes, but not quite a majority.

The fact Le Pen would not win a majority was somewhat hoped for last week after the smaller-than-anticipated share of the votes obtained in the first round of voting. Markets expressed their relief last week, with the euro and equities moving higher. Again this morning risk appetite has started strong after the apparent left-wing victory, but jitters have started to creep in as the European session gets underway. 

The road ahead isn’t going to be easy. Jean-Luc Mélenchon, who leads the Popular Front (a union of his hard-left France Unbowed, Socialists, Greens and Communists) will need to find support from other parties to gain a majority, something he might struggle with. Alternatively, we could see a coalition of Macron’s party with some groups of the left, but this would likely exclude the left hardliners, including Mélenchon Popular Front. Even then, they may not have enough seats for a majority.

Thus, the relief from avoiding a hard-right government under Marine Le Pen has been shortlived. Not only does a split parliament add a layer of political uncertainty – which is never a good thing for markets – but digging deeper into Mélenchon’s agenda is likely to give investors a little panic. He vows to roll back on Macron’s pension reforms, refusing to comply with the European Union’s excessive deficit procedure. If they were to implement it, it would be deeply market-unfriendly.

The French CAC 40 broke to a three-week high at the open, pushing above the 200-day SMA (7,628). The RSI remains below the mid-line which continues to put downward pressure on the index. The momentum has turned lower throughout the session as the risk-aversion has sunk in.

CAC 40 daily chart

_{Past performance is not a reliable indicator of future results.}

The euro also reacted positively to the initial results but has managed to hold on to the momentum so far. EUR/USD has built on the gains from last week managing to stay above a key confluence of moving averages around 1.0790. The RSI remains in bullish territory but there may be some resistance up ahead as it starts to flatten out. 1.0850 could be the next area where buying appetite gets tested. 

EUR/USD daily chart 

_{Past performance is not a reliable indicator of future results.}