FX Daily: Le Pen’s Court Ruling Not A Big Event For The Euro

A court decision on whether to allow Marine Le Pen to run for office today has great implications for French politics, but is probably limited for markets, which may well be pricing an RN win (and sound enough fiscal policy) also under Jordan Bardella. Elsewhere, FX volatility may stay capped in a quiet day data-wise. JPY intervention risk remains high.

USD: Quiet markets, carry favoured

The week has started on a quiet note in FX. ISM services was bang on consensus yesterday at 54.0, and the prices paid subcomponent declined largely as expected. A speech by the Fed’s Chris Waller also failed to stir things up in markets. He tentatively criticised Warsh’s forward guidance ban and said risks have flipped on the hawkish side for the Fed. Hardly anything new to markets.

FX volatility may stay capped ahead of tomorrow’s FOMC minutes and given a rather empty US data calendar today. We argued yesterday that markets probably require a convincing narrative to short the high-yielding dollar in such a favourable environment for carry. Unless the minutes surprise on the dovish side (we don’t think so), that narrative should not emerge this week, and DXY can stay closer to 101.0 than 100.0.

The major risk for DXY probably stems from potential large-scale FX intervention in Japan. USD/JPY continues to go its own way – regardless of USD swings – and is back close to 162.0 after a brief post-NFP correction. Failing to intervene below 163.0 could fuel speculation the new line in the sand is closer to 165.

Elsewhere in APAC, we expect a hike by the Reserve Bank of New Zealand tomorrow morning (announcement 0400 CEST). As discussed in our preview, this has turned into a rather close call after the decline in oil prices. But markets are pricing in 18bp for this meeting and 58bp by year-end, and a hold looks like too big a risk for dovish repricing and potential de-anchoring of inflation expectations. NZD upside may still prove relatively limited as a tight decision may cast doubts that this will be followed by another hike this year.

EUR: Court decision on Le Pen not that important

All eyes in Europe are on a Paris appeal court ruling on Marine Le Pen’s embezzlement case. She remains banned from office, and if upheld, the RN is likely to be led into the April 2027 presidential election by Jordan Bardella.

Both Le Pen and Bardella are ahead of other potential candidates in the polls, but a reversal of Le Pen's ban could strengthen the RN and shift expectations in favour of a Le Pen candidacy over Bardella.

We doubt this event has great market potential though. We suspect OATs and the euro can be seriously unnerved only by a surge in support for left-wing candidates like Jean-Luc Mélenchon at this stage. For now, polls suggest Le Pen or Bardella would beat Mélenchon comfortably, with tighter run-offs versus centre-right (and likely market-friendly) candidates such as Edouard Philippe and Gabriel Attal. We think markets have largely priced in a Le Pen or Bardella win, and that either would deliver sufficient fiscal prudence to limit bond volatility, potentially along the lines of Giorgia Meloni’s approach in Italy.

Today, we don’t expect much action in the euro anyway. We see a risk of 1.140 being retested soon, but low volatility may be the name of the game considering no strong data or central bank inputs.

Elsewhere in Europe, sterling has been performing well recently and could indirectly get a boost today from the gilt market. Here, the Bank of England releases its Financial Stability Report update at 1030CET. In focus will be whether the BoE removes gilts from its Leverage Exposure Measure, against which banks have to hold 3.25% of Tier 1 capital. Doing so could increase domestic demand for gilts, reduce government borrowing costs (by perhaps 10-20bp) and loosen financial conditions in general. On a quiet day, if delivered, this move could send EUR/GBP through support at 0.8545 towards the 0.8500 area.

CZK: Soft CPI may test CNB hawkish pricing

The Czech Republic releases June inflation this morning, the first print since the CNB’s June rate hike. Our economists expect headline inflation to ease further from 2.1% to 1.9% YoY, with downside risks from lower fuel prices. Core inflation is also expected to edge down from 2.9% to 2.8%. Both readings would therefore come in below the CNB’s May forecast of 2.1% and 2.9%, respectively.

Markets are currently pricing in almost the full rate hike over a one-year horizon, which could come under pressure today if softer inflation is confirmed. Still, we do not think this would materially alter the CNB’s hawkish tone unless core inflation surprises meaningfully to the downside. Core inflation, strong wage growth and robust credit activity were the key reasons behind the June hike. At the same time, the CNB expects headline inflation to move above 3% later this year and especially early next year. In our view, the current low headline inflation below the 2% target is therefore unlikely to change the central bank’s communication much.

EUR/CZK has moved back to lower levels in recent days, closer to 24.150, helped by weaker US data and some dollar softness. However, our model suggests the rate differential is more consistent with levels around 24.250, and weaker inflation could push the koruna weaker today. We are therefore short-term bearish on CZK for now, but beyond this week we still expect a hawkish CNB and a later rebound in EUR/USD to drive a more sustained move lower in EUR/CZK.

HUF: Lower inflation opens path to more rate cuts

Hungarian inflation dropped further from 1.8% to 1.7%, below market expectations. This is also below the National Bank of Hungary's forecast in its June Inflation Report (2.0%). This will therefore cement the rate cuts in July and August.

Based on yesterday’s pricing, the market was pricing around 150bp of easing and a 4.50% terminal rate, in line with our forecast, assuming BUBOR remains above the policy rate at the end of the cycle. While this appears sizeable in a global comparison, relative to 2024 there is still room for the market to price in at least one additional rate cut in our view. Conditions are much more favourable than they were two years ago, so we expect the dovish inflation path to push pricing further towards additional easing.

This should mechanically be negative for FX. However, we think the rate differential has only a limited impact on EUR/HUF at the moment, with the market more focused on domestic politics and the euro adoption story. In the short term, the forint may come under some pressure as more cuts are priced in, but over the medium term we expect EUR/HUF to stabilise within the current 350-356 range. At the same time, the forint may continue to benefit from summer carry demand.