The Euro (EUR) appears to be waiting for cues from French coalition talks, with scenarios ranging from a left-wing government to a market-friendly technocrat prime minister. FX volatility has continued to drop in the meantime but EU politics may revamp it, ING FX analyst Francesco Pesole notes.

France faces a rather unusual political stalemate

“The market has been inundated with all sorts of scenario analysis after the French election resulted in a rather unusual political stalemate in France. Many are looking at precedents in the more coalition-prone Italian politics of the past few years for inspiration. That is not too much of a stretch, especially in the instances of a technocrat prime minister solution to coalition impasses.”

“In France, a coalition that includes a technocrat prime minister would likely require the exclusion of the most left-wing factions of the New Popular Front party, and it remains unclear whether this is feasible in terms of parliamentary arithmetics. That would be the most market-friendly scenario in the near term as it would prevent large spending measures.”

“The spectrum of less market-friendly options is rather wide and intricate. For now, it is likely that negotiations will prove anything but easy for President Emmanuel Macron, and markets may grow impatient. A rewidening in the OAT-Bund spread remains a tangible risk, and we see EUR/USD upside capped in the near term.”