By Yoruk Bahceli and Amanda Cooper
LONDON (Reuters) -The euro hit a 10-day high on Sunday after the first round of French elections put the far right in first place but offered little further clarity on the final outcome, leaving investors bracing for further volatility. .
Marine Le Pen’s National Rally (RN) took the lead in the first round, confirming expectations, although analysts noted her party won a smaller share of the vote than some polls had initially expected.
But uncertainty prevailed as the final outcome will depend on how parties decide to join forces in each of the country’s 577 constituencies for the runoff, setting the stage for days of horse trading ahead of next Sunday’s runoff.
One poll showed that the RN might win an absolute majority.
The euro, which has fallen 0.8% since President Emmanuel Macron called elections on June 9, rose 0.3% to $1.0749, the highest level since June 20, when the Asia-Pacific trading session opened on Monday , according to LSEG data.
“I think it was a slight ‘well, there were no surprises’, so there was a sense of relief there. Le Pen had a slightly smaller margin than some polls had indicated, which may have helped the euro a bit higher. on the open market,” says Fiona Cincotta, senior market analyst at City Index.
The shock vote has roiled markets as both the far right and the left-wing alliance that finished second on Sunday have promised big spending increases. Investors are alarmed given France’s already high budget deficit, which has prompted the EU to recommend disciplinary action.
Last week, demand from premium bondholders to hold French debt above Germany’s rose to the highest level since 2012, amid the eurozone debt crisis.
Shares of the three major lenders have fallen between 9% and 14%, leading to losses of almost 7% on the Paris stock index.
Attention will turn to the bond and stock markets when they open for European trading on Monday. Analysts expect little meaningful recovery in French government bonds.
“We are struggling to see a material and sustained pullback,” said Peter Goves, head of developed markets government bond research at MFS Investment Management.
Markets had calmed after the initial unrest that followed the election announcement after the RN toned down some of its more radical plans and said it would respect EU budget rules requiring France to reduce its deficit, but they suffered another blow on Friday to endure.
NO RESPIT
Markets were expected to remain volatile given the high uncertainty surrounding next week’s final results.
Much depends on closing political deals. Candidates through the second round have until Tuesday evening to decide whether to withdraw or run.
The left-wing alliance would withdraw candidates who finish third on Sunday from the second round, said Jean-Luc Melenchon, leader of the France Unbowed party.
If alliances to prevent the RN from taking power appear credible, French bonds could rebound, says Kathleen Brooks, research director at trading platform XTB.
Adding to the uncertainty, Sunday’s high turnout suggests France is heading for a record number of three-way run-offs – which the RN is expected to benefit far more than two-way matches.
“Markets are looking forward to another week of very high uncertainty. Probably fear, as it is still possible that RN will gain an outright majority next week,” said Carsten Brzeski, Global Head of Macro at ING.
