Euro or Pound? All roads lead to Paris

Note: This section contains information in English only.
Source: Dukascopy Bank SA
With 2016 marking the year of slim chance turned reality, it has become part of analysts' agenda to speculate on whether tail risks could pose a threat to 2017 events as well, one of them being the French Presidential Election. The pre-election race has been up for a rocky start with scandals worthy of the US Presidential cycle surrounding all three main candidates – Francois Fillon, Emmanuel Macron and Marine Le Pen and has led to jumps in financial and currency markets amid rising uncertainty in the Euro zone. 

Francois Fillon was accused of drawing government funds to allegedly pay his wife and other family members for work that may or may not have been actually done. Despite being pressured to step out of the race, he has remained strongly in favour of his innocence and has called the accusing reports misrepresentative and his actions – legal and transparent. Fillon would have been a somewhat ‘safe card' for markets had he not lost his lead over other candidates whom voters have now determined to be the lesser of several evils. Fillon has taken the top place when it comes to tasting the consequences of election-run scandals while his rivals have managed to cope more easily. 

Polls suggest that Emmanuel Macron has taken the lead and stands the biggest chance of becoming president after the second round in May. Le Pen is not expected to get to the second stage but beat center and socialist candidates Francois Bayrou and Benoit Hamon in the first election round. But polls have been wrong before - says Brexit, Trump and Renzi's step-down, and they can be wrong again, claim market strategists as they follow the French election narrative with a great deal of uncertainty. And if there is a candidate that really makes markets wary - it is Le Pen. 

Marine Le Pen has been strongly advocating France leaves the European Union in a stance consonant with rising populism all over the globe. A Le Pen victory, although seemingly unlikely, has shaken up some risk-on sentiment and sketched a few scenarios for the biggest currencies of the 28-country union. It is not hard to see that the Euro is the main victim here – yet another threat to the unity of the single currency block posed by a far-right populist leader could make the currency crumble. Furthermore, we are yet to see to what degree panicking markets would regard the risks of the block falling apart when Brexit becomes more than a one-time betrayal or "dumb mistake" but the beginning of a new economic era for Europe. 

Continuing the scandalous pre-election streak, Le Pen was accused of funding staff for her party with money from Bruxelles that was supposed to be paying wages for her EU-related workers - and it remains unclear what effect it will leave on her campaign in the current political context.  

It is, however, not all bad for everyone when it comes to a Le Pen win in the French Presidential Election. This could be one of the first real good news for the Pound, especially when going against the weak Euro, due to supposedly better Brexit terms and a peer en route to the UK's envisioned "new Europe". A Fillon win could also arguably bring the British currency up and about again, leading to a more optimistic than not outlook for a post- French election Pound. 

When it comes to scandals on the election-trail, the independent centrist Emmanuel Macron escaped unscathed when compared to the other candidates with allegations of leading a double wife away from his wife, including a gay affair, which he was quick to deny in a whimsical comment. 

Even though analysts are quick to evaluate the strength of all parties involved, it is hard to speculate on any French election scenario as it has emerged that there is more to come when scandals are resolved or have evolved, meaning that it is just too early to tell. Another risk factor stems from biases which appear to be leading to underestimation of the strength of the right wing and Le Pen – one of which is Fillon's support to the controversial candidate in case of an election campaign overthrow along with his voter base which is likely to flow to Le Pen.
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