ING’s Francesco Pesole writes that EUR/USD is moderately undervalued versus short-term fundamentals, reflecting a persistent France-related risk premium that could widen if French bonds sell off further. He sees a challenging backdrop for Euro bulls, expects a possible test of 1.110, and notes that ING has revised its EUR/USD forecast down to 1.13 for the fourth quarter of 2026 and first quarter of 2027.

France risk and weaker euro outlook

"EUR/USD is around 1.5% undervalued relative to short-term fundamentals. This suggests a moderate build-up in France-related risk may be becoming entrenched in the euro, but also that the risk premium could expand further if French bonds continue to lose value."

"For now, that’s not our baseline. While it’s early to call for a retightening of the OAT-Bund 10yr gap, expectations that this year's budget can be passed via decree may help contain the spread below 150-160bp."

"It’s hardly a welcoming environment for EUR bulls, though. Beyond several ECB appearances, including Lagarde's, there are few other domestic drivers for the euro this week."

"Markets are already fully priced for a December hike, leaving limited scope for additional hawkish support, while an October move still looks unlikely."

"A test of 1.110 remains the risk for EUR/USD, even if we expect some stabilisation today. We have revised our EUR/USD forecast lower to 1.13 for 4Q26 and 1Q27."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)

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