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How will the surprise French election result affect the euro, CAC40 and bonds?

​​Political upset in France with left-wing and not right-wing alliance winning a relative majority is likely to lead to political gridlock.

Euro Source: Adobe images

​​​Political upheaval in France

​The left-wing New Popular Front (NPF) unexpectedly won a relative majority in the recent French legislative elections, beating expectations that the far-right National Rally would prevail. However, NPF's victory may prove short-lived amid likely political infighting over forming a governing coalition.

​NPF, an alliance of leftist parties including the greens, socialists, communists and France Unbowed, secured 182 seats - more than any other party but short of the 289 needed to control parliament. President Macron's centrist Together coalition took 163 seats, while the far-right National Rally (NR) took 143, far less than polls had suggested.

​No clear mandate

​Despite the highest voter turnout since 1981, the election produced no clear winner. France now faces a split parliament and a shift of power from the presidency to the National Assembly. The opposing ideologies of potential coalition partners threaten gridlock in forming a workable government.

​While the National Rally had a disappointing election, it still increased its presence in parliament significantly, gaining an additional 54 seats compared to just a couple of years ago. The result leaves open the possibility of further far-right gains in the 2026 mayoral and 2027 presidential elections.

​Uncertainty reigns

​​The messy election outcome plunges France into political uncertainty. President Macron must postpone policy plans until a governing majority emerges. Meanwhile, Prime Minister Attal's impending resignation leaves confusion over new leadership during a sensitive time.

​Forming a leftist "rainbow coalition" looks unlikely given policy divides. If no alliances congeal, Macron may resort to installing a technocratic caretaker government to maintain stability amid economic concerns. But such a move risks public backlash.

​More political uncertainty lies ahead for Europe’s third largest economy

​With no quick resolution in sight, France faces the spectre of persistent legislative paralysis and turbulence which could have a profound impact on its credit rating, French bond yields, stocks and the euro.

​Financial market reaction

​​As of early trading on Monday morning, French 10-year government bond yields traded at 3.23%, marginally above Friday’s 3.20% low, the French/German OAT/Bund spread briefly at 3-week lows before trading back at Friday’s levels of around 0.69%.

​​The euro depreciated versus several major currencies with EUR/USD trading lower at $1.0815, EUR/GBP at £0.8447 and EUR/JPY at ¥173.89.

​In overnight trading the CAC 40 slid by around 0.6% but this could partly have been on the back of Asian markets falling ahead of this week’s US and China inflation data, although the slide in French equity indices seems to be more pronounced than that of its European peers.

​Technical analysis on French CAC 40

​The front month CAC 40 futures contract, which on Friday flirted with its 24 June high at 7,744 and briefly rose to a 3-week high at 7,752.5, dropped to the 200-day simple moving average (SMA) at 7,636.5.

​​CAC 40 daily candlestick chart

​CAC 40 daily candlestick chart Source: TradingView.com
​CAC 40 daily candlestick chart Source: TradingView.com

​While the major French stock index stays above its mid-to-late-June lows at 7,468-to-7,460 but trades below Friday’s 7,752.5 high, it remains within a sideways trading range.

​A break out of this range will likely determine the next medium-term trend. ​A rise and daily chart close above last week’s 7,752.5 high would confirm a double bottom chart formation and put the early-to-late May lows at 7,890-to-7,911 on the cards, as well as the 55-day SMA at 7,905 and the psychological 8,000 mark.

​​En route lies the May-to-July downtrend line at 7,796 which needs to be breached first.

​​Only a fall through the 7,460 June low could provoke a slide towards the January low at 7,284 and perhaps even lead to the 7,000 region being revisited.

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