If we exclude the March-April 2020 Covid-induced market turmoil, the 10-year OAT-Bund spread (now at 53bp) is at the widest since the 2017 election period. Back then, the spread reached a peak of approximately 80bp. In FX, the EUR/USD 1-month implied volatility has climbed back above 9.00%, as the 1M risk reversals widened to 1.90% in favour of puts. There is an evident “kink” in the EUR/USD volatility curve around the second-round date (24 April), although all these indications of increasing political risks are quite contained compared to the 2017 vote. We suspect there is more room for France-related political risk premium to be priced into the EUR/USD as we head to this weekend’s first round. And indications from the first round votes that Le Pen might have the numbers to win in the second round would likely increase pressure to the euro next week. When adding the potential negative spill-over from new sanctions against Russia, we see the risks to EUR/USD skewed towards the 1.0750/1.0800 area into the weekend. - ING FX Strategist
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