New French PM to be announced today – ING

The only tepid and very short-lived EUR relief to Wednesday’s French political news is understandable. Despite the OAT-Bund 10Y spread falling back to the low 80s (bp), the more forward-looking FX market is seeing limited room for optimism, ING’s FX analyst Francesco Pesole notes.

A return to 1.1700 remains a possibility

“As a new prime minister is set to be announced today, there is a general feeling that the political backing remains weak. The market-appeasing pledge by outgoing PM Lecornu about delivering on budget obligations is hardly enough to price out French risk.”

“If US jobs data – whenever released – leans more toward weakness than strength, and next week’s CPI figures support the case for a Fed rate cut in October, then French political risk would need to escalate into broader contagion across European bonds to sustain downward pressure on EUR/USD. We don’t see the conditions for this happening at the moment. As complicated as the budget situation in France is, markets’ vigilance generally makes parties trade more carefully on fiscal themes, with the post-Truss UK and previously Italy being two cases in point.”

“Should EUR/USD take another hit, we would expect decent buying in the dips close to 1.150, a level that would represent over 2% short-term model unless accompanied by widening of front-end spreads in favour of the USD. A return to 1.170, albeit not in a smooth, unidirectional fashion, remains our preference.”