06:22 AM EST, 11/07/2024 (MT Newswires) -- The German government collapsed and the bone of contention in the end proved to be the use of fiscal stimulus and disagreement over the suspension of the German debt brake, said ING.

This puts into stark relief the challenge for the European economy faced by a looming trade war and weak domestic demand, wrote the bank in a note. The prospect of a new German government next March might actually increase the chance of some fiscal stimulus and provide better ammunition for Europe to withstand incoming United States President Donald Trump's trade agenda in 2025.

EUR/USD found support below 1.07 on Wednesday -- perhaps not a surprise after a peak-to-trough drop of 2.3% on the day and even moving more aggressively than the foreign exchange options market had been pricing, stated ING. While profit-taking on EUR/USD short positions could drag it back to the 1.0800 area, the bank thinks EUR/USD will tend to trade in the lower half of its 1.0550-1.1150 two-year range for the rest of the year.

For example, it will be interesting to see what Trump's election means for European investment intentions -- the International Monetary Fund had noted this as a key negative factor under increased tariffs.

The Bank of England is widely expected to cut rates by 25bps on Thursday, bringing the policy rate to 4.75%, pointed out ING. Most expect the vote count will be 8-1 in favor of a cut, although sterling could quite easily receive a temporary boost if the vote is 7-2 or 6-3.

More impactful for sterling, however, should be Governor Andrew Bailey's press conference, according to the bank. He's likely to be asked how stimulative he finds last week's British budget. The budget helped the market re-price the BoE easing cycle higher by some 25bps, recalled ING.

The bank believes the market's pricing of the BoE lending rate at above 4.00% next year is too high. ING thinks the BoE will cut more than that. As a consequence, the bank sees downside risk to U.K. rates and sterling on Thursday if Bailey downplays the significance of the UK budget to the BoE easing cycle.

That means EUR/GBP could enjoy a temporary spike back to the 0.8370/8400 area, added ING. Medium term, however, the bank increasingly expects EUR/GBP to prove a 0.82/83 story as the fall-out of trade wars weighs more heavily on the euro than sterling.

Today in Central and Eastern Europe will be busy with the Czech central bank's (CNB) meeting and Poland's NBP press conference as well as some retail sales data. Wednesday the NBP confirmed rates were unchanged at 5.75% as expected and the statement brought some upward revision to the inflation forecast, noted ING.

Financial markets are pricing in a first cut for March next year, while ING sees Q2 as more likely. As a consequence, the NBP presser should be rather neutral for the zloty (PLN) in the current environment.

ING predicts the CNB to cut rates again by 25bps to 4.00% and present a new forecast including some dovish changes. The bank thinks markets are on the hawkish side here and especially in the context of the U.S. election, ING believes markets should reassess expectations in a dovish direction given the openness and weakness of the Czech economy. Thursday's meeting should as such be slightly negative for the koruna (CZK).