Where we are: EUR/USD trades at 1.1646, down 0.05% on the day, caught between 1.1625 and 1.1656. Fiber remains below the prior NY close, with momentum favoring a retest of the lower end of the range. The pair is struggling to hold ground against a broadly firming dollar as markets handicap the divergence between ECB and Fed policy.
What’s driving it: The mildly dovish ECB bias is weighing on the Euro, particularly with wage tracker data softening and services HICP hovering near 3%. While a fresh energy spike or a re-acceleration in services inflation could deter a follow-up rate cut at the June 5th meeting, the market is leaning towards further easing. This comes as data from France and Spain showed higher-than-expected inflation, potentially bolstering the case for ECB hawks. Rising US yields alongside a stronger DXY are adding to the downside pressure on the single currency.
- The German 2-year Schatz yield has edged down 2bp to 2.550% showing that investors are pricing in more easing.
- ECB research highlighting the potential for an Iran war impact to “doubly scar” Eurozone consumers underscores the fragility of the economic outlook.
- Speculator positioning in the Euro is modestly long, with net non-commercial positions at +33,513 contracts, around the 12th percentile, but this positioning is well off recent highs and not indicative of any near-term squeeze.
NY session focus: Focus now turns to any further reaction to the higher Eurozone inflation numbers reported overnight. Keep an eye on any surprises from US data, though the main event is behind us. The US-DE 10Y yield spread at +149bp continues to favor USD strength and offers a good indication as to where the pair will go if the risk bid takes a breather. Watch for a break below 1.1625, which could trigger a run towards 1.1600. The pain trade is a surprisingly hawkish signal from an ECB speaker, igniting a short squeeze to 1.1700.