EUR: Beware of French bond optimism – ING

The message that European Central Bank (ECB) officials sent from Sintra was one of patience. There is clearly no pressure to move with back-to-back rate cuts given slower disinflation, and it seems that the preference is also for a wait-and-see approach over verbal intervention when it comes to the recent bond market turmoil, ING FX strategist Francesco Pesole.

EUR/USD moves to 1.0800 and lower this week

“Market expectations for ECB easing (40bp by year-end) were given an implicit nod by some speakers openly discussing the chances of further cuts. There is a good probability those expectations will remain quite stable throughout July, meaning that the policy factor should not really be a major driver for EUR/USD.”

“We had argued for a move to 1.0800 on the back of softer US data this week, but admit that the move came in before our expectations given the shockingly low ISM services. We remain somewhat doubtful that markets will be comfortable with EUR/USD trading close to 1.09 given lingering uncertainty about French politics and the rising risk of a Trump re-election.”

“In France, there has been a remarkable tightening in the OAT-Bund 10-year spread, which closed at 66bp yesterday from a late-June peak of 82. The main trigger was the news that numerous centre and left-wing candidates have dropped out of three-way runoffs to curb the rise in Marine Le Pen's right-wing Naitonal Rally party. This raises the chances of a hung parliament.”