French political drama sent EUR/USD below 1.05 yesterday. Rate spreads have pushed out to the wides of the year as the market assumes that pressure is only going to grow on the ECB for rate cuts if governments in both France and Germany are out of order, ING’s FX analysts Chris Turner note.

EUR/USD correction may be limited to the 1.0550 area

“EUR/USD may not need to fall much further from here at the moment. And indeed there is some upside risk if US JOLTS data disappoints today.”

“However, any EUR/USD correction may be limited to the 1.0550 area. Expect EUR/USD to pay increasing attention to the French-German bond spread and the French sovereign CDS to see how far investors are prepared to push French sovereign risk.” 

“We are a little surprised not to see EUR/CHF trading below 0.93 on this news and continue to favour a retest of 0.9200/9210 over the coming months.”