06:12 AM EDT, 08/27/2025 (MT Newswires) -- The euro isn't actively trading on the French political turmoil, but it's likely facing some degree of restraint from it, said ING.

French equities had another bad day, but what matters is the sovereign bond OAT's performance, wrote the bank in a note. The euro's correlation with European Union bond spreads to German Bunds tends to be either very low most of the time or quite high for short bursts.

For Italian bonds, the pain threshold was around 200bps; for French bonds, ING doesn't have enough history to be sure, but a break above December's high of 90bps -- currently at 77bps -- can trigger a significant euro reaction.

Such a move would suggest fiscal concerns are outweighing political instability, stated the bank. The latter seems largely priced into the OAT risk premium, given that politically stable Italy is trading at almost the same 10-year yield despite a BBB+ rating.

Markets are still making up their minds about the aftermath of the upcoming French confidence vote and don't seem in a rush to price snap parliamentary elections as the baseline scenario, pointed out ING. The alternative -- this or a new government watering down spending cuts enough to gather parliamentary support and deliver some fiscal consolidation -- is plausible, though admittedly a relatively narrow path given the heightened scrutiny it faces.

Anyway, markets appear to have absorbed the initial bad news and might stabilize ahead of the actual vote on Sept. 8. The euro will look at the July European Central Bank minutes on Wednesday and should be free to benefit from any indications of a bigger hawkish front, seeing no more need to cut rates. The bank thinks EUR/USD can hold above 1.160 and ultimately make its way back to 1.170.

Another indication that French politics is having a limited currency impact is EUR/GBP, which has faced only limited downside pressure since the start of the week, added ING. That said, the balance of risks remains more tilted to the downside for the pair, with the hawkish repricing in Bank of England rate expectations still underpinning decent sterling (GBP) short-term momentum.

A test of 0.860 remains possible, even though the bank's longer-term view is less optimistic on sterling, given the possibility of a dovish rethink of BoE cuts later in the fall. In GBP/USD, ING still thinks a structural break above 1.35 is a matter of when rather than if.

Tuesday's meeting of Hungary's central bank (MNB) didn't bring much new information, according to ING. Rates and forward guidance remained unchanged as expected. The only thing that caught the bank's eye was a question during the press conference about the upcoming Federal Reserve cuts and whether this changes anything for the MNB.

The governor emphasised that the focus is on Hungary and the inflation problem, but this is clearly welcome news for the MNB and potential rate cuts in future. Although there is some probability of a rate cut this year, the bank's baseline remains stable rates until the beginning of next year. The extension of price measures seems like a welcome change for the MNB, but it isn't a game-changer either.

Still, markets remain on the hawkish side with a 50% chance of a rate cut this year and a 5.60% priced terminal rate. Wednesday, there are June wage figures.

Together with the outpricing of positive sentiment from United States-Russia negotiations and the unwinding of long positioning in the forint (HUF), ING is on the bearish side for the coming days.