ING Comments on Euro

EUR/USD is back around 1.07 following a soft session for risk sentiment on Tuesday, noted ING.

The OAT-Bund 10-year sovereign bond spread continues to hover around 75bps-80bps, which may well be the level at which it will approach the French election on Sunday, wrote the bank in a note. A poll of polls by Bloomberg published Tuesday sees a widening of Marine Le Pen far-right National Rally's (NR) lead to over 35% with the leftist New Popular Front (NPF) alliance stable at 28%.

Markets appear to be making peace with the prospect of an NR victory and parliamentary gridlock, especially after Le Pen's party attempted to ease market concerns on the fiscal side. ING suspects investors remain much more sensitive to a better-than-expected result by the NPF, which recently announced a 25 billion euros spending plan for 2024, followed by another 150 billion euros by 2027, and is now perceived in markets as a greater threat from a fiscal stability perspective.

In other eurozone news, European Central Bank (ECB) official Olli Rehn sounded relatively dovish -- he is considered a generally neutral figure -- in an interview early Wednesday, saying that market pricing for two more rate cuts in 2024 looked "reasonable." Markets have been revamping rate cut bets in the eurozone over the past two weeks, with the December OIS contract back at pricing in 45bps of easing after as little as 30bps on June 10, pointed out the bank.

While investors aren't hugely hinging on ECB communication at the current juncture, Rehn's words were a signal of tolerance towards inflation bumps, which is a euro (EUR) negative, stated ING. Still, EUR/USD price action into the weekend will be determined by French election positioning and Friday's United States PCE.

The bank has a bias for a weakening in the pair on Wednesday and Thursday back to June's lows (1.0670), before a rebound on Friday on encouraging PCE figures.