Latest polls show Marine Le Pen's far-right RN party remains in the lead (35%) ahead of Sunday's first-round parliamentary vote in France, followed by left-wing NPF party (29%) and President Emmanuel Macron's centrist coalition (19%), noted ING.
Barring a change in these poll figures before the weekend, political uncertainty may well keep a lid on the euro (EUR) in the coming days, wrote the bank in a note.
ING continues to keep a close eye on the EUR/USD risk premium (undervaluation in the bank's short-term fair value model). As of Friday's close, that amounted to 0.9% in ING's estimates, well below the 2.4% peak of June 14 and also below the 1.8% the bank had identified as a historical benchmark.
ING saw the 10-year OAT-Bund spread widen to a new peak (82bps) on Friday, and there are lingering risks of further pressure on French bonds into the vote. The bank sees risks skewed to the downside for EUR/USD before the Friday-Sunday events in the United States and the European Union.
On Friday, consumer price index (CPI) figures for France, Spain and Italy will start directing expectations ahead of the eurozone-wide estimate for June to be released on July 2, but the proximity to the French vote means any upside surprises may still struggle to feed into a stronger EUR.
EUR/USD may find more sellers below 1.0700 in the coming days on the back of political risk, added ING. Should US PCE offer no support to the pair, the 1.0600 April lows will be at reach.
Another pair to watch this week is EUR/SEK, which has paused its big downward trend ahead of the Sweden central bank (Riksbank) announcement on Thursday, stated ING. The bank expects a hold with unchanged guidance and limited implications for Sweden's korona (SEK).
ING pointed out it believes the Bank of England (BoE) took a step in the direction of an August rate cut last week, even though core policy communication didn't change meaningfully. Markets remain undecided on an August move (14bps priced in) and in the bank's view, are also still too conservative on the total easing this year with 47bps versus ING's call for 75bps.
The bank's dovish BoE view means a bearish call on sterling (GBP) this summer. Investors could also see some negative spillover on GBP from the United Kingdom parliamentary election (July 4), where a Labour landslide win is largely expected -- but perhaps a good result from the populist hard-Brexiteer Reform UK party may create some market jitters.
However, political uncertainty currently weighs more on the euro than on sterling, and that's why ING thinks a re-appreciation in EUR/GBP beyond 0.8500 has likely been delayed. Still, the bank sees wide upside room for the pair once the EU political noise has settled due to monetary policy convergence.
Sterling looks more likely to display weakness against the US dollar (USD) in the near term and the bank expects a move to below 1.25 in Cable in July.
This week's calendar is very quiet in the UK data-wise and there are no BoE speakers scheduled for now.
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