Euro falls sharply as far right gains prompt French snap general election

The euro dropped 0.5% on the dollar to $1.0747, its lowest since May 9, prompted by Emmanuel Macron calling a snap election

French president Emmanuel Macron appearing on a TV screen at the French far-right National Rally party election night headquarters on Sunday in Paris.  

The euro fell sharply on Monday after gains by the far right in European Parliament elections prompted French president Emmanuel Macron to call a snap national election.

The uncertainty in France adds one more element to what will be a busy week for markets with US inflation data due on Wednesday, the same day as a US Federal Reserve policy meeting, and a Bank of Japan meeting rounding off the week.

The euro dropped 0.5% on the dollar to $1.0747, its lowest since May 9. It also fell 0.55% on sterling to a near two-year low of 84.43 pence, and was last down 0.5% on the Swiss franc at a seven-week low of 0.9632 francs. 

The increase in support for right wing parties was "generally what was expected, but the surprise element is that Macron has reacted by calling a snap election, so that makes the market more nervous", said Lee Hardman, senior currency analyst at MUFG.

The dollar was also boosted after last week's jobs report showed that employers added more jobs than expected in May, while wages also rose more than anticipated, leading traders to pare back expectations that the US central bank will cut rates as soon as September.

Paula Comings, the head of foreign exchange sales at US Bank in New York, said: 

The market was clearly caught wrong-footed. 

Wednesday’s US consumer price index for May will be the next major data point to drive Fed expectations. If inflation comes in softer, “the market's going to feel some relief. I think the dollar could weaken, but probably not out of its recent range,” said Ms Comings. If it is high, however, "euro/dollar would continue to trade down towards the lower end of the range", she said. 

European stock markets also fell sharply. Mr Macron's unexpected decision to call an election could hand major political power to the far right after years on the sidelines, putting Marine Le Pen's National Rally (RN) party in charge of the domestic agenda, including economic policy.

"The European election results raise the possibility of RN becoming the largest group in the French parliament," economists at HSBC noted. 

If RN gains an absolute majority at the National Assembly, president Macron could be forced into a 'cohabitation' period and might have to appoint a prime minister from RN. 

Shares in French motorway operators Eiffage FOUG.PA and Vinci SGEF.PA fell by more than 5% while airports group Aeroports de Paris ADP.PA and energy firm Engie shed over 4% and 3%, respectively.

The pan-European Stoxx 600 index fell 0.4%. Most Stoxx 600 sectors traded lower, with eurozone banks the worst hit, while oil and gas stocks gained, tracking higher crude oil prices. Traders have scaled back bets of two more European Central Bank rate cuts this year after it gave little hint of further moves.

ECB policymaker Peter Kazimir said in a blog post that the central bank should sit out the summer before contemplating another rate cut, while fellow policymaker Joachim Nagel likened the path for interest rates to a mountain ridge rather than a peak. 

• Reuters