06:15 AM EST, 12/02/2024 (MT Newswires) -- French politics looks to be belatedly playing a role in foreign exchange and driving euro underperformance, said ING.

Marine Le Pen is threatening to bring down Prime Minister Michel Barnier's technocrat government as her far-right RN party seeks to squeeze further amendments to the budget, wrote the bank in a note.

ING had thought Le Pen might not want to bring down the government and be blamed for a French financial and economic crisis. Yet it looks like the pressure may stay on the euro with a potential no-confidence vote coming on Wednesday.

French politics can help solidify EUR/USD resistance at 1.0570/1.0600 this week, while short-term support will be found in the 1.0465/1.0500 area, stated the bank.

ING currently has 1.05 as an end-year EUR/USD forecast, but sees downside risks here -- even though the US dollar seasonally softens in December.

Elsewhere, the bank thinks EUR/CHF is priced too high above 0.93 and can easily see French politics driving it back to important support at 0.9200/9210 in the exchange rate with the Swiss franc.

It looks like French politics has proved the catalyst to take EUR/GBP under 0.83 again, pointed out ING. The United Kingdom data calendar is quite light, although Thursday's release of the Bank of England's Decision Maker Panel survey could provide some clues on inflation expectations.

Here, the BoE view seems to be that late-cycle inflation risk means that the central bank has to be gradual with its easing cycle.

Only three BoE cuts are priced over the next year and unless inflation expectations drop sharply this week, which isn't consensus, sterling rates being traded like US dollar rates should mean that EUR/GBP stays offered, noted ING. It looks for EUR/GBP to test its recent low at 0.8260.

Central and Eastern European foreign exchange continues to diverge with Hungary's forint (HUF) record weakness, with Poland's zloty (PLN) and Czech Republic's koruna (CZK) rallying on the other side. Given the underperformance of CZK rates last week, the bank expects EUR/CZK to have further potential to continue moving lower and a test of 25.200 may be on the table, especially with the governor's speech scheduled, which usually leads to hawkish repricing.

While ING believes the PLN has rallied too much, very dovish Polich central bank pricing provides the chance for some correction after NBP's press conference this week, which could support foreign exchange again.

EUR/HUF still remains near two-year highs, but the appointment of a new Hungary central bank governor could add some reassurance to the market, according to ING. On the other hand, Moody's changed the rating outlook from stable to negative on Friday, which may make Monday's opening a weak one for HUF assets.