Markets show a renewed focus on French politics. Further EUR/USD consolidation in a 1.11-1.12 range seems likely, ING’s FX strategist Chirs Turner notes.

EUR/USD downside risks early this week

“The new French government has started to float the idea of tax hikes on businesses and the wealthy as a means of addressing France's nearly 6% of GDP budget deficit. This is not a great environment for the Euro, nor for EUR/USD to push above major resistance at 1.12. Further EUR/USD consolidation in a 1.11-1.12 range seems likely, with downside risks early this week.”

“Elsewhere, one of our favourite FX barometers for the global economic cycle – EUR/AUD – is coming lower. This move is fully consistent with a reflationary environment and a steeper US yield curve. The trend may also be helped from the Australian/China side tomorrow. Here, the Reserve Bank of Australia is expected to continue to hold its semi-hawkish line, which means it will be the last of the G10 central banks to cut.”

“And there is speculation that China could announce some domestic support measures tomorrow during a press conference held by the People's Bank of China and two other agencies. Look for EUR/AUD to retest the recent low at 1.6250 and probably head to the 1.60 area over the coming weeks and months.”