06:12 AM EDT, 10/02/2024 (MT Newswires) -- EUR/USD looks expensive in light of wider rate differentials -- in favor of the dollar -- and rising risks from the Middle East and French politics, ING said

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, wrote the bank in a note.

French Prime Minister Michel Barnier faced a rough first speech in parliament, drawing criticism from both factions on the left and right as he laid out his policy plans. Despite a central pledge for fiscal consolidation, he delayed by two years to 2029 the plan to bring back the deficit within the 3% European Union limit.

That kept France's sovereign bond OATs offered, and the 10-year spread with Germany's Bunds close to 80bps. ING 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 favor of the euro, as markets are already pricing in 70bps by year-end from the United States Federal Reserve and Tuesday's decline in eurozone's inflation below the 2% target means significant pressure on the European Central Bank to continue cutting at the October meeting, stated ING.

The bank retains its call for EUR/USD re-testing 1.1000 in the short term.

Wednesday there is the decision by Poland's central bank on rates. It's hard to expect anything other than no change at 5.75%, pointed out ING. So, on Wednesday the bank will rather watch the central bank's statement but more importantly the governor's press conference on Thursday. Markets will be looking for some hints on the timing of rate cuts next year.

The zloty (PLN), like currencies in the rest of Central and Eastern Europe and emerging economies, came under pressure as part of the risk-off mood in the markets, added ING. However, this does give investors interesting levels at 4.290 EUR/PLN, the highest since the first half of September, ahead of the central bank meeting and press conference.

The dovish shift has already passed, but markets are overshooting rate cut expectations in the bank's view, which could lead to some hawkish repricing. The first rate cut is set for around January and 180bps for the whole of next year.

Although in the current global conditions it may be difficult for rates to find a way up, still in relative terms the differential should improve, while attention could turn to the local story at least for a while. While ING doesn't see the possibility of a fade moment right now, PLN may be the first currency in the CEE region to try to reverse some losses among its peers, according to ING.