With regards to the specific factors at play in the French first round, the market's expectation is for centrist Emmanuel Macron and far-right Marine Le Pen to sail through into the deciding face-off to take place on May 7. Should an upset occur whereby, for example, Macron is eliminated at this hurdle, leaving Le Pen to meet with far-left candidate, Jean-Luc Mélenchon, French risk assets are likely to post a more extreme downside reaction. Independent research house Vanda Securities has put the odds of this eventuality at 11 percent in a recently published note.
The markets are pricing in a relatively low probability of a Le Pen victory, according to Jordan Rochester, FX strategist at Nomura, in recent research.
"If Marine Le Pen fails to gain as many votes as expected from the first round then the market will likely reduce the event risk for the second round considerably and EUR would rally," he began.
"On the flipside, if she gains more votes than expected (29 percent or so to be meaningfully different from the polls) or if even more surprisingly if Mr Macron fails to make it into the second round then we think the market will seriously reassess the risks," continued Rochester, positing that the euro would likely sell off and the spread between French and safe haven German government bonds would widen in such a scenario.
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