EUR/USD looked expensive in light of wider rate differentials (in favour of USD) and rising risks from the Middle East and French politics. Ultimately, it was the Israel-Lebanon-Iran tensions that triggered a move below 1.110, but the other two factors also remain negative for the pair, ING’s FX strategist Francesco Pesole notes.

EUR/USD set to re-test 1.1000 in the short term

“French Prime Minister Michel Barnier faced a rough first speech in the Parliament, drawing criticism from both left- and right-wing factions as he laid out his policy plans. Despite a central pledge for fiscal consolidation, he delayed the plan to bring back the deficit within the 3% EU limit by two years, to 2029. That kept OATs offered, and the 10-year spread with bunds close to 80bp. Our rates team is doubtful there is much respite in sight for French bonds.”

“On the rates side, short-term differentials look unlikely to retighten sharply in the near term in favour of EUR, as markets are already pricing in 70bp by year-end from the Fed and yesterday’s decline in eurozone’s inflation below the 2% target means significant pressure on the ECB to continue cutting at the October meeting. We retain our call for EUR/USD re-testing 1.1000 in the short term.”