ING: The EUR - FJElite

French bonds' premium shrank further yesterday, with the lOy spread to bunds tightening to 125bp. The move appeared to be driven primarily by an improvement in global bond market sentiment and, to a lesser extent, by Marine Le Pen's pledge to reduce the budget deficit sharply to 3.7% of GDP next year. One indication of a lingering French premium is the French- Italian lOy spread, which remains wide at 22bp and has only corrected 5bp from last week’s peak.

While it's clear that Le Pen is attempting to establish herself as the market-friendly candidate, our macro team notes that her plan currently rests on ambitious spending-cut targets rather than a fully costed programme, with major uncertainties around how €140bn of savings, particularly on pensions, would be achieved. We therefore aren’t convinced her words are enough to drive a material OAT recovery from here.

The euro welcomed tighter spreads, but the rebound has lost steam overnight on the back of higher oil prices. A return towards 1.1150/1.1180 remains the risk today. EUR/CHF has now recovered roughly half of its October losses, but a move beyond 0.940 would likely require a broader improvement in sentiment towards the French fiscal outlook, which still looks premature.