06:19 AM EDT, 06/28/2024 (MT Newswires) -- It looks like investors are already bracing for the outcome of Sunday's first round of French parliamentary elections, said ING.

The 10-year OAT-Bund sovereign yield spread is trading at a "wide" 82bps and EUR/USD is drifting back under 1.07, wrote the bank in a note to clients.

If a candidate doesn't secure 50% of the vote in the first round, the top two candidates go forward to the second round vote on July 7. The polls point toward Marine Le Pen's far-right party winning 35% of the vote, the leftist coalition at 28% of the vote, and the center at 20%, results that would spell a complete wipeout in parliament for President Macron's party, ING said.

The question for the market is whether a Le Pen government looks at the French bond market and starts dropping some of its plans for seemingly unfunded tax cuts -- or pushes ahead. The bank's eurozone team suspects it will be too early for a new government to substantially water down its pre-election pledges and that it may well be a rocky few months into September -- when France needs to deliver to the European Commission its plans on how it will fix its over 5% budget deficit.

This period suggests a further risk premium can be built into French bonds and into the euro (EUR), too, added ING.

Ahead of the weekend election, Friday sees the European Central Bank (ECB) release its consumer inflation expectations for May. Three-year expectations currently sit at 2.4% and a drop under there -- marking the lowest levels since before Russia invaded Ukraine -- would add to expectations that the ECB could cut again in September.

Currently, the market attaches a 64% probability to such an outcome. Perhaps the ECB will take encouragement from Sweden's Riksbank which Thursday added the possibility of an extra cut in the second half.

Friday's EUR/USD game plan could see a brief spike to 1.0745/60 on the United States inflation data of later in the day, but the bank wouldn't be surprised to see it end the day back under 1.07 as investors brace for the weekend elections.

Elsewhere, the Swiss central bank (SNB) releases its Q1 foreign exchange (FX) intervention data on Friday. ING doubts EUR/CHF holds gains to the 0.9620, possibly 0.9650 area, and sees it back at 0.9500 during a hot summer of French politics.

GBP/USD is edging higher on Friday -- helped in part by an upward revision to British Q1 gross domestic product (GDP) data. Encouragingly, consumption seemed to be the biggest driver here. However, ING still forecasts the Bank of England (BoE) will begin cutting rates in August and will start to signal that in speeches once next Thursday's parliamentary election has passed.

Somewhat "amazingly," United Kingdom rates are still priced very similarly to the US, according to the bank. ING has a much greater conviction that UK rates will come lower and that sterling (GBP) will be dragged lower too.

GBP/CHF has had a decent bounce off of 1.1200, but ING looks for the move to stall ahead of 1.1400 and a return to 1.12 this summer.