ING Comments on Euro, Sterling

French-German government bond yield spreads narrowed a little and the euro edged up after representatives of France's far-right National Rally (RN) said the party will respect the nation's budget rules, noted ING.

However, the plan to cut 7 billion euros in taxes still seems to be alive -- partially funded by slashing France's contribution to the European Union budget, wrote the bank in a note.

ING's eurozone macroeconomic team sees continued stress here and, as a consequence, it warns against chasing EUR/USD back to and over 1.08, since there are still many possibly bearish chapters to play out. One of those could be the Leftist Alliance doing a little better than expected in Sunday's parliamentary elections.

While bond investors will welcome the RN's soothing words about France's budget, the bank suspects it is too early for the party to be making significant concessions to its manifesto.

As a consequence, ING expects that the euro will struggle to sustain a rally over the coming weeks and that key euro cross rates, such as EUR/AUD and EUR/NOK, will drop. These moves should accelerate should United States inflation come in on the low side.

EUR/USD may as such struggle to break to the topside of its 1.0660-1.0760 range, added the bank.

Looking at forward curves, it's "remarkable" that United Kingdom interest rates remain priced so close to the US, according to ING. Both price around 45bps of rate cuts this year and both have a terminal rate for forthcoming easing cycles around the 3.30%-3.40% area. The bank's conviction view this summer is that U.K. rates will be repriced lower starting with a rate cut in August.

This should lead to a lower sterling, stated the bank.

Investors won't hear anything more from the Bank of England until after the July 4 parliamentary election. But afterwards, ING expects the more dovish members of the seven who voted for unchanged rates last week will speak up.

Uncertain developments in the eurozone suggest EUR/GBP may struggle to break back above 0.8490 in the short term. But a cross rate like GBP/NOK could come lower over the next month if both U.S. rates come lower and the BoE doves emerge in July, pointed out the bank.