As geopolitical tensions between the East and West rise, sanctions and souring relations could have lasting impacts on business globally.
Macron is very supportive of the European Union, so investors favour him due to the stability he could bring in a time of disruptive global politics. His victory would be a sign that the tidal wave of populism it was feared Brexit and Donald Trump had sparked will not sweep through the major political institutions of the Eurozone.
Macron secured 23.8% of the vote compared to Le Pen’s 21.6%, which was very close to what last week’s polls had indicated. This gives investors hope that the data suggesting Macron will trounce Le Pen on May 7th with 62% of the vote is correct.
Although the ideal outcome would have been for Macron to go through alongside conservative candidate Francois Fillon, markets believe he has enough support to easily see off Le Pen, who plans to withdraw France from the Eurozone.
The worst case scenario would have been for Le Pen to get through with Jean-Luc Melechon; a leftist who is very critical of the European Union and may have tried to hold a referendum on France’s EU membership.
The euro is rebounding sharply from its pre-election lows, rising 1.3% against the pound to £0.8477 and 1.4% against the US dollar to US$1.0872. UK businesses repatriating euro-profits today would receive more pounds than a few days ago, while exporter’s goods will become more expensive – which could lead to weaker sales volumes, especially if the recovery continues.
However, from a long-term cash flow perspective the euro has hardly recovered, with today’s strong gains only going so far as to erase the losses of the last week or so. EUR/GBP is still -5.3% lower than its March high of £0.8780 while EUR/USD is back around its March best after hitting a one-month low of US$1.0576 two weeks ago.
So, while the euro is currently enjoying a relief rally, there is a chance it will begin to weaken again as the final round of voting approaches. There will likely be plenty of polls released in the coming two weeks and the results of these could deviate wildly.
Business owners therefore need to take into account that today’s euro strength could be fleeting, or it could be just a small rise ahead of a much more significant recovery, or anywhere in between. Cash flow forecasts will need to account for a wide variance in potential costs and earnings.
The euro will respond positively to indications that Macron continues to enjoy strong support, while any signs Le Pen is gaining in popularity will weaken the common currency. Regardless of who the polls indicate is likely to win, investors are likely to become jittery ahead of the actual vote, which could lead the euro to decline regardless of recent developments.
If your business is trading in euros, get in touch to discuss a tailored foreign exchange plan that can help you optimise your international payments and protect against volatility in currency markets.
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