Authors: Rae Wee and Harry Robertson
SINGAPORE/LONDON (Reuters) – The euro rose on Monday after a convincing and historic victory for France’s far right in the first round of general elections, which came in slightly below expectations. The final result depends on party agreements before the second round of elections, which will take place next weekend.
Meanwhile, the yen hovered near a 38-year low after data showed Japan’s economy contracted more than initially forecast in the first quarter, keeping investors alert for signs of intervention to shore up the currency.
Marine Le Pen’s far-right National Rally (RN) party won a landslide victory in the first round of France’s parliamentary elections on Sunday, exit polls showed, although analysts noted that it received fewer votes than some polls had initially predicted, sparking a stir enhance in stock and bond prices.
The euro was last up 0.4% at $1.0759, about a two-week high. It has shed about 1.2% since France’s far-right triumph in European Parliament elections in early June, prompting President Emmanuel Macron to call early elections in France.
“They (RN) actually performed a little bit worse than expected,” said Carol Kong, currency strategist at Commonwealth Bank of Australia (OTC:).
“We could actually reduce concerns about more expansionary and unsustainable fiscal policy if the far-right party did a little worse.”
Investors fear that the RN could come to power by “coexisting” with Macron and pushing a policy of high spending and Euroscepticism.
“The results of the first round do not provide much certainty about the composition of parliament, and the second round scheduled for next weekend is in fact a high-risk event,” said Francesco Pesole, currency strategist at ING.
Pesole also said the fact that the left-wing coalition, which also wants to boost government spending, did not receive more votes than expected would also likely strengthen the euro.
The rise in the euro caused the dollar to weaken slightly against a basket of currencies, although the U.S. currency lost ground after data on Friday showed U.S. inflation fell in May, reinforcing expectations that the Federal Reserve will begin cutting interest rates later year.
The indicator was last seen lower by 0.14% at 105.57, which is the lowest level in a week.
Against the dollar, sterling rose 0.27% to $1.268, while sterling rose 0.1% to $0.6677.
According to the CME FedWatch tool, current market pricing indicates a 63% probability of the Federal Reserve cutting interest rates in September, up from a 55% probability a month ago.
“If inflation continues at current levels… we could see a first 25 basis point cut as early as September,” said Michael Brown, senior research strategist at Pepperstone.
JEN UNDER PRESSURE
The yen failed to strengthen against a generally weaker dollar and was last seen falling slightly to 161.03 per dollar, a slight difference from a 37.5-year low of 161.27 hit on Friday.
The yen has fallen more than 12% this year, with the recent drop to a weaker 160 per dollar keeping investors on high alert for Japanese authorities to intervene to shore up the currency.
Data showing weaker-than-expected economic growth has increased uncertainty about the next interest rate change by the Bank of Japan.
The Bank of Japan will meet in slow July and has hinted it may raise borrowing costs, potentially helping to narrow the huge spread between Japanese and U.S. interest rates that has weakened the yen this year, prompting investors to seek higher yields on U.S. bonds.
Separate data released on Monday showed business sentiment in Japan’s services sector deteriorated in June, offsetting a significant enhance in factory confidence.
