The two-year EUR:USD swap rate continued to widen in favour of the dollar yesterday, and is now around -110bp, some 25bp below the -85bp mid-September levels, ING’s FX strategist Francesco Pesole notes.
EUR can fall below 1.110 in the coming days
“The notion that an inflation-concerned ECB would move more carefully than the Fed on easing is crumbling, as Powell continued to signal no interest to cut by 50bp again and inflation figures in Germany, France, Spain and Italy are all endorsing the ECB doves’ case for a cut in October. Even ECB President Christine Lagarde struck a more dovish tone yesterday as she pointed to greater confidence in disinflation, which will taken ‘into account in our next monetary policy meeting in October’.”
“The large moves in the EUR:USD short-term rate differentials are pointing to a weaker EUR/USD now. Incidentally, we could see some fresh political risk premium being built into the euro as new French Prime Minister Michel Barnier is facing an even worse than expected deficit situation, and a likely political battle ahead to push forward any budget consolidation measures.”
“Our rates team does not expect any respite in French bond spreads. Barnier delivers a key Parliamentary speech at 3PM CET today: expect some debt market volatility spilling into the euro. All in all, barring surprise in EZ and US data, we think EUR/USD can trade back below 1.110 in the next couple of days, and test 1.100 if US unemployment doesn’t tick higher on Friday.”
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