06:03 AM EDT, 09/03/2025 (MT Newswires) -- EUR/USD remains cheap according to ING's model, which places the short-term fair value around 1.190.

While French geopolitical risk may keep the euro (EUR) from rapidly reconnecting with stronger rate differentials, the bank thinks the impact of OAT underperformance on the euro has likely run its course.

Tuesday's slightly hotter-than-expected core inflation numbers (2.3% year over year) in the eurozone brought the two-year EUR swap rate back above 2.10%, said ING. The implied probability of a European Central Bank cut by year-end is now only one in three.

While the bank thinks that is too conservative, it may take some time for a dovish repricing and any negative euro impact to materialize, considering multiple reiterations by ECB officials that they are in a good place when it comes to rates.

It's quite likely that any potential policy comment by ECB President Christine Lagarde at an ESRB event on Wednesday will reinforce this cautious stance. ING believes EUR/USD has some ground to recover after Tuesday's drop, with a return above 1.170 quite possible in the next few days.

Sterling (GBP) had a rough Tuesday as back-end gilt yields rose, with the 30-year hitting its highest level since 1998, wrote the bank in a note. It's important to note, though, that the long-dated bond selloff was happening across Europe on Tuesday, and gilts didn't underperform their peers.

Tuesday's 0.7% rise in EUR/GBP highlights just how sensitive sterling is to yield increases, but ING takes a conservative view and doesn't expect sterling to fall much further on gilt moves alone.

While the rise in back-end yields is getting a lot of attention amid scrutiny of the United Kingdom fiscal situation, much of the increase is tied to higher inflation and hawkish repricing of Bank of England rate expectations rather than fiscal concerns, added ING. Demand for extra-long-dated debt (like 30-year gilts) has been weak across developed markets, but a 10-year gilt auction attracted very strong demand, raising a record 14 billion pounds. That doesn't support the idea that fiscal concerns are outweighing inflation and BoE repricing in driving yields higher.

The bank isn't optimistic on sterling as ING still expects the BoE to cut rates by year-end, but the moves in back-end gilts don't seem dysfunctional and don't justify a persistent risk premium on sterling, especially given the U.K. government's likely fiscal consolidation plans. For now, ING thinks EUR/GBP belongs below 0.870.

Poland's central bank (NBP) is likely to cut rates by 25bps to 4.75% on Wednesday, in line with market expectations. The rate cut is supported by a better inflation outlook. On the other hand, last week's higher-than-expected draft state budget deficit is more likely to prompt a hawkish response from the central bank.

As a consequence, markets are most likely to see a hawkish cut on Wednesday, which could be indicated by the statement following the decision. Thursday's press conference will be key, where investors should hear a cautious tone, pointed out ING. The bank recently lowered its expected rate cuts for this year from three to two (including Wednesday's decision), which is roughly in line with market pricing.

However, some MPC members have already indicated that September's rate cut may be the last. Although this rhetoric may change later, for Wednesday's meeting and Thursday's press conference, the bank sees it as support for the zloty (PLN). As such, ING sees a good chance for EUR/PLN to return below 4.250.

Tuesday's court ruling triggered some volatility in Turkey, where ING saw a spike in bonds and currency implied yields, while USD/TRY spot appears unaffected. Still, the court's decision on Sept. 15 should be more important for markets, but Tuesday's headlines and reaction indicate current market nervousness.

ING continues to prefer the spot market for these reasons, where the Central Bank of Turkey (CBT) appears to have the situation fully under control and carry remains sufficient, while the bond market appears to be the most sensitive.

The bank remains bullish on the Czech Republic's CZK, and after Tuesday's expected correction, 24.500 EUR/CZK may be an opportunity for new shorts here.