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Everyone anticipated a hung parliament in France, but the left-wing coalition's surprise victory has sent ripples through the market. Despite this upset, Macron’s party securing second place might help balance the scales and keep French bond spreads from widening too drastically.

The euro is still more of a G-10 follower than a leader so that it will swing in the US dollar's moves.

 Across the Atlantic, all eyes are on Powell's testimony on Capitol Hill and the CPI report this week. Before the CPI data, we could see some short-term trend twists but don't hold your breath for anything too dramatic.

During the Asian trading session, the euro remained relatively calm after the weekend's second round of French elections. The EUR/USD has been comfortably nestled within a familiar range of 1.080 to 1.0850.

The absence of a clear majority casts uncertainty over the formation of the next government. 

Political analysts are buzzing with two main scenarios for President Macron, as per Bloomberg:

1. He could try to stitch together a "centre-left" coalition, roping in centrist and left parties while giving the far-left France Unbowed party a wide berth.
2. He could opt for a technocratic administration.

Socialist leader Olivier Faure has taken the high road, saying his party’s job is to “find a path” to address the needs of the French people. Meanwhile, Jean-Luc Mélenchon, the leader of France Unbowed, has declared that the New Popular Front would implement its entire program and has flatly refused to play ball with President Macron.

Political uncertainty in France is set to linger like a bad croissant until there’s more clarity on the next government’s shape. With no party securing an absolute majority, the next government will likely struggle to push through its policies. While not ideal, this scenario is less disruptive than a majority win for either the far-right or far-left, whose policies could have thrown a real spanner in the works. But for now, the euro gets a breather.

You’d think last week’s dreary economic data would have weakened the dollar notably. However, with the dollar-yen pair clinging to 161 and the euro showing only modest gains, it seems the market is holding its breath for this week’s CPI numbers.. We still see the US dollar trade with a weaker bias, meaning traders will sell on rallies.

In conclusion, while France’s political scene is anything but settled, the markets are keeping their cool—for now. Stay tuned as the drama unfolds!

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