French government bonds and EUR under pressure ahead of upcoming French presidential election

Upbeat data from the euro area this week, with strong manufacturing PMIs and German ifo readings failed to boost the single currency. French government bonds and the EUR remain under pressure, as investors’ remain focused on the upcoming French presidential election and the risk of a Marine Le Pen win.

The Front National (FN) candidate Marine Le Pen has threatened that France will leave the European Union and the euro if she wins the presidential election. Latest polls show that it is still most likely that either the independent candidate Emmanuel Macron or the Republican François Fillon will become France's next president. However, there is a significant risk that Marine Le Pen could win the presidential election.

"In our view, it is still questionable whether the public would vote in favour of leaving the EU/euro in such a referendum," said Danske Bank in a report.

That said, even if Le Pen is elected, whether she can or will actually hold an EU/euro referendum will depend largely on FN’s performance in parliamentary elections in June and support from her chosen prime minister.

EUR periphery spread is likely to widen and Nordic FX and FI markets would see safe-haven inflow if Le Pen wins. Danske bank expects the ECB to use its existing QE flexibility to support countries vulnerable to financial spillover.