4 Min Read
* Euro drifts lower in morning trade in Europe
* Many players moving to sidelines ahead of first round of voting
* Options pricing still shows substantial concern over result
* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh
By Patrick Graham
LONDON, April 21 (Reuters) - The euro fell back on Friday, trading almost a cent off this week's highs as investors prepared for the first round on Sunday of a tight French presidential election race.
Traders said an upbeat flash Purchasing Managers' Index survey from France and polls showing centrist Emmanuel Macron still in pole position ahead of the vote had helped settle nerves after a dip late on Thursday.
There was no obvious reaction to the shooting of a French policeman in central Paris overnight, an attack claimed by Islamic State.
But with options markets suggesting investors are extremely concerned about the chances of strong results for far-right and far-left candidates Marine Le Pen and Jean-Luc Melenchon, the euro fell 0.2 percent against the dollar in morning trade in Europe.
"I think everybody is locked down," said Simon Derrick, head of the global markets research team at Bank of New York Mellon in London.
"It is kind of reminiscent of the big events last year where people know that it is a binary outcome so the best approach is to remain as cautious as possible."
Other major currency pairs were stuck in tight ranges, with Britain's weakest quarterly retail sales number in five years doing minimal damage to sterling after a 4-cent surge earlier this week.
The numbers provided further evidence of a weakening of the consumer demand that has propped up economic growth since the Brexit vote last June. But they come at a time when investors seem optimistic about Prime Minister Theresa May's shock decision to call an early general election for June 8.
"We used to think that when the going got tough, the Brits went shopping, but this retail environment is too much for the hardy British consumer," said Jeremy Cook, an analyst with corporate and retail currencies provider World First.
"If these poor numbers are a shock then you haven’t been paying attention."
The big risk for currency markets is Le Pen's opposition to the euro and France's European Union membership but even if she makes it into the run-off as expected, the odds of her beating Macron or conservative Francois Fillon are rated as low.
Mapping what it says have been tightly-correlated moves in the euro against the odds of a Le Pen presidency this year, Goldman Sachs analysts estimated the euro could appreciate to $1.13 if she is knocked out of the race in Sunday's vote.
Conversely, an improvement in her odds of winning and a resulting sharp rise in the chances of France leaving the euro, could weaken the euro by around 5 percent, bringing it close to parity with the dollar, they said.
Others, however, stress that should Le Pen perform broadly in line with polling to date, confidence she cannot win in the second round should see the euro appreciate.
"Absent a shock result in the French election, the euro should rally," analysts from Societe Generale said in a weekly note.
For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets (Editing by Catherine Evans)