EUR: French politics to drag – ING

FXStreet Insights Team FXStreet

As expected, French PM Francois Bayrou lost his vote of confidence in parliament yesterday and has tendered his resignation, ING's FX analyst Chris Turner notes.

EUR/USD may stall in the 1.1790/1800 area temporarily

"The question now is whether the discordant political parties decide to agree on the 'what' (how to reach an agreement on the budget) before agreeing on 'who' to lead the government. None of this can be seen as good news for the euro, and no doubt there will be episodic underperformance of French government bonds as investors speculate whether President Macron will be forced to call early elections."

"EUR/USD, however, is doing fine. The drop in short-dated US rates has brought dollar hedging costs for euro area-based investors in US assets down to 2.12% per annum – the lowest since early April. This should encourage fixed-income investors in particular to raise their dollar hedge ratios and pressure the spot dollar exchange rate. It's just that our US money market story above discourages us from pushing for a big move through the 1.1830 high just yet."

"The eurozone calendar is quiet today, but we do hear from a couple of ECB speakers: Joachim Nagel and Francois Villeroy de Galhau, both of whom are at a BIS Innovation Summit. Commentary on ECB policy looks unlikely so close to Thursday's ECB rate meeting. EUR/USD may stall in the 1.1790/1800 area temporarily. But 1.20 is undoubtedly the multi-month target."

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FXStreet Insights Team

FXStreet

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