Synopsis:

ING highlights the potential for more risk premium build-up in EUR/USD as political uncertainty looms ahead of the French parliamentary elections. Marine Le Pen’s far-right RN party is leading in the polls, which is contributing to a cautious outlook for the euro.

Key Points:

1. Polls and Political Uncertainty:

   • Marine Le Pen’s far-right RN party leads with 35% in latest polls.
   • The left-wing NPF party follows with 29%, and President Macron’s centrist coalition holds 19%.
   • Political uncertainty is likely to persist, affecting euro sentiment.

2. Risk Premium in EUR/USD:

   • As of Friday’s close, the EUR/USD risk premium was estimated at 0.9%.
   • This is below the 2.4% peak on 14 June and the 1.8% historical benchmark identified by ING.

3. Bond Market Indicators:

   • The 10-year OAT-Bund spread widened to a new peak of 82bp on Friday.
   • Further pressure on French bonds is expected as the vote approaches.

4. Market Sentiment:

   • ING sees risks skewed to the downside for EUR/USD before the weekend’s political events in the US and the EU.
   • Political developments in France are likely to keep a lid on the euro in the near term.

Conclusion:

ING anticipates more risk premium build-up in EUR/USD ahead of the French parliamentary elections. The leading position of Marine Le Pen’s far-right party and the resulting political uncertainty are expected to weigh on the euro, with potential further pressure on French bonds and downside risks for EUR/USD leading into the weekend’s events.