Where we are: EUR/USD is currently trading around 1.1640, recovering from a six-week low seen overnight. The pair traded in a narrow 1.1615-1.1645 range in early European hours and is attempting to build on gains from Friday’s close near 1.1620. Resistance looms at last week’s high around 1.1670, while support rests at the 1.1600 level.
What’s driving it: The Euro is catching a bid this morning, largely on the back of the risk-on mood fueled by optimism surrounding potential US-Iran talks. The ECB’s mild easing bias remains a factor, but is currently overshadowed by external developments. While the latest Eurozone HICP figures showed some softening, coming in at 2% YoY, the core reading remains sticky at 2.3%, potentially giving doves pause for thought at the June 5th meeting. Any re-acceleration in services inflation could halt the ECB’s easing cycle, even if only temporarily. This underpins a floor to the Euro downside for now, and it’s US-Iran headlines driving the short-term narrative.
- The ECB cut rates by 25bp to 2.50% at its April meeting, but maintained a meeting-by-meeting approach to future policy decisions.
- Money markets are still pricing in two ECB rate cuts before year-end, indicating a disconnect with the stickiness in core inflation.
- Speculator positioning in the Euro is modestly long, but not at an extreme, with net non-commercial positions at +33,513 contracts, representing just 4.1% of open interest (12th percentile). Squeeze risk is not a major factor currently.
NY session focus: Keep an eye on the headlines around potential US-Iran negotiations – any further positive news flow will likely support risk assets and keep the Euro bid. There are no major US data releases scheduled for today, putting the focus squarely on sentiment and geopolitical developments. A break above 1.1670 would open the way to 1.1700, while failure to hold 1.1620 could see a retest of the overnight lows. The trade that’s working is fading dips on Euro strength driven by risk-on sentiment. The trade at risk is chasing the Euro higher without a firm resolution to US-Iran talks. The pain trade for the Euro is a hawkish surprise from the ECB ahead of the June meeting.