In the article mentioned above, we estimate that an extension of the run in US treasury yields to the 5.0% mark would take EUR/USD to 1.02. That is not our base case, but the ongoing pressure on the euro is clearly not confined to the US rates story. The ongoing re-rating of growth expectations in the eurozone has ultimately come through to the FX market and taking a toll on the common currency.
Developments in the US activity story remain much more important, and if signs of weakness emerge across the Atlantic (and markets price in more Fed tightening) we expect a swift turnaround in EUR/USD, but that may not be a story for the near-term. Holding at the key 1.0500 support will be a success for those hoping for that turnaround to happen anytime soon.
Today, the eurozone calendar is light until tomorrow’s CPI figures start to come in, and there are no scheduled European Central Bank (ECB) speakers after Austrian hawk Robert Holzmann said it was unclear whether the peak in rates had been reached yesterday.
Across the British channel, the economic calendar is also looking empty today, with no scheduled central bank speakers. We continue to flag downside risks to the 1.2000 area in Cable, while EUR/GBP may struggle to hold on to recent gains as sterling’s recent underperformance relative to the euro starts to look a bit overdone now that the big bulk of the Bank of England repricing has happened.
Developments in the US activity story remain much more important, and if signs of weakness emerge across the Atlantic (and markets price in more Fed tightening) we expect a swift turnaround in EUR/USD, but that may not be a story for the near-term. Holding at the key 1.0500 support will be a success for those hoping for that turnaround to happen anytime soon.
Today, the eurozone calendar is light until tomorrow’s CPI figures start to come in, and there are no scheduled European Central Bank (ECB) speakers after Austrian hawk Robert Holzmann said it was unclear whether the peak in rates had been reached yesterday.
Across the British channel, the economic calendar is also looking empty today, with no scheduled central bank speakers. We continue to flag downside risks to the 1.2000 area in Cable, while EUR/GBP may struggle to hold on to recent gains as sterling’s recent underperformance relative to the euro starts to look a bit overdone now that the big bulk of the Bank of England repricing has happened.
Trade active:
EUR/USD near 1.05 would suggest that a lot of confidence has been lost in the euro. Yet the European Central Bank's trade-weighted euro is just 2.5% off its July highs. We can probably all agree that the dominant trend is a strong dollar. However, two developments this week warn that the euro may be due some independent weakness. The first is the suggestion from some ECB officials that Minimum Required Reserves for European banks need to be raised - perhaps substantially. Our banking specialists in research feel that such a move would hit banking liquidity at a crucial juncture and no doubt weigh further on already soft bank lending. We think an MRR hike would be a clear euro negative.
Additionally, another emerging story this week is the Italian BTP- German Bund 10-year spread widening out to 200bp as the Italian government announces looser fiscal policy. This will put the issue of the return of Maastricht fiscal criteria back in the spotlight for early next year and will be a factor worth assessing for whether it puts a renewed risk premium back into the euro.
Based on the above, there seems no reason to fight this bearish EUR/USD trend just yet. But for today, keep a look out for German and Spanish inflation - in case it builds momentum for one last ECB hike. If not, expect EUR/USD to continue drifting to the 1.0400/0410 area.
Elsewhere, the Czech National Bank (CNB) has laid out its strategy for its forthcoming easing cycle - a cycle we expect to start in November.
Additionally, another emerging story this week is the Italian BTP- German Bund 10-year spread widening out to 200bp as the Italian government announces looser fiscal policy. This will put the issue of the return of Maastricht fiscal criteria back in the spotlight for early next year and will be a factor worth assessing for whether it puts a renewed risk premium back into the euro.
Based on the above, there seems no reason to fight this bearish EUR/USD trend just yet. But for today, keep a look out for German and Spanish inflation - in case it builds momentum for one last ECB hike. If not, expect EUR/USD to continue drifting to the 1.0400/0410 area.
Elsewhere, the Czech National Bank (CNB) has laid out its strategy for its forthcoming easing cycle - a cycle we expect to start in November.