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The euro experienced a decline on Sunday following the projections of a hung parliament in France's election and a stronger than expected performance by the left-wing New Popular Front.
The development has created fresh uncertainty in the markets and set the stage for potential future volatility.
Market analysts noted that while the third-place forecast for Marine Le Pen’s far-right National Rally (RN) brought some relief, there are concerns about the potential impact of the French left’s agenda on President Emmanuel Macron’s pro-market reforms.
Additionally, there are worries that political gridlock could hinder efforts to address France's high debt, which was at 110.6% of GDP in 2023.
At the start of the week’s trading, the euro fell by 0.2% to $1.081. Last week, it had risen as opinion polls indicated the likelihood of a hung parliament, easing concerns about a far-right victory.
However, the currency had previously dropped sharply, along with stocks and bonds, when Macron called for the elections in early June.
Simon Harvey, head of FX analysis at Monex Europe, commented that while anti-far right parties gained significant support, the market perspective remains unchanged with a looming legislative vacuum in France.
Harvey also noted that the bond market will be a key area to monitor, suggesting the possibility of a decrease in French bond prices.
Trading in French bonds and stocks is set to commence on Monday morning in Europe.
The leftist alliance, comprising the hard left, Socialists, and Greens, is projected to secure between 172 and 215 seats out of 577, based on early results from polling stations.
Macron’s centrist alliance is expected to win 150-180 seats, while the RN is forecasted to gain 115 to 155 seats.
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