GBP EUR Could See Further Losses from Macron Win

GBP EUR Lower After Retail Sales Disappoint

The GBP EUR exchange rate was sharply lower last week after being rejected at the 1.2050 level. Traders now await the final count from the French election with a Macron win being a spur for further gains in the euro. The German economy will see the release of IFO Business sentiment this morning with a dip expected.

The GBP to EUR opens the week trading at 1.1887 with support at the recent 1.1800 level being key.

Euro would see Brexit-like shock with a Le Pen win

Goldman Sachs said that polls this close to election day have historically been precise for similarly tight election races, which explains why prediction markets repriced Mr. Macron’s odds of winning higher at 90%, up from 80% last week.

While the polls are showing a Macron victory, there remains a threat of a victory for M. Le Pen as uncertainty around the final choice of those who voted for Jean-Luc Mélenchon in the first round remains. Some early surprises also indicate that change may be coming: as the Globe and Mail notes, Le Pen has won the voting in Guadeloupe, Martinique and French Guiana; where Macron won all three in 2017.

Many polls show Emmanuel Macron is likely to win a second term Sunday, but some are cautious and banks like Citigroup warn that markets are underestimating the risk of a surprise.

If nationalist Le Pen were to win, the euro and European stocks will tumble on Monday, while French bonds would underperform German securities, according to investors and strategists. The full consequences wouldn’t be visible until after legislative elections in June, when it would be clear whether she has a majority to back her proposals.

“It would be an awful day for markets,” said Eric Hassid at Aurel BGC in Paris. “I still think Macron will win, but the opinion polls that come after the presidential debate will be crucial. It wouldn’t be the first time there’s a surprise. We had the same with Brexit.”

In an investment note Wednesday, Barclays strategists led by Emmanuel Cau wrote that a 5% drop in equity markets was possible in the event of a Le Pen victory. On the credit side, Barclays strategists warned that corporate bond investors shouldn’t get too confident about the possibility of Le Pen becoming the next president, saying that risks point to the downside.

“It would only take one poll indicating a tighter race to trigger an underperformance of French credits,” the Barclays analysts wrote. “Given the lack of any risk premium in these credits, we remain wary.”

In the UK, Trade Minister Penny Mordaunt said the UK was on the brink of signing eight state-by-state trade deals as hopes fade of a larger pact.

Mordaunt suggested that the ‘mini’ deals could give British businesses access to as much as 20% of the US economy. However, House Speaker Nancy Pelosi has warned the UK not to expect any bilateral trade deal if the Good Friday Agreement is not respected.