Scotiabank strategists Shaun Osborne and Eric Theoret report the Euro (EUR) is slightly softer versus the Dollar, with its late-July rally stalling as price action mirrors yield spreads. Markets still price a hawkish European Central Bank (ECB) path, with about 24 bps of tightening expected in September and 40 bps by year-end. Sentiment remains constructive, with risk reversals showing a modest premium for EUR strength and support seen in the mid-1.16s.
Euro soft but sentiment stays constructive
“The EUR is soft, down a fractional 0.1% vs. the USD and a midperformer among the G10 currencies in mixed trade. The EURs rally from late July looks to have stalled, with price action that has largely mirrored the movement in yield spreads.”
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“ECB rate expectations remain hawkish with markets pricing 24bpts of tightening for the September 10th meeting and a cumulative 40bpts by year end.”
“The latest comments from Executive Board member Schnabel have maintained a hawkish bias, highlighting upside risks to inflation related to both geopolitical developments and resilient euro area growth.”
“Data releases have been limited however measures of sentiment are constructive with risk reversals now pricing a modest premium for protection against EUR strength.”
“The RSI remains firmly in bearish territory hovering around the overbought threshold at 70.”
“The ~1.1350/1.17 rally from late July looks to have stalled however, with recent gains struggling to extend much above 1.1700. The subsequent price action has revealed short-term support in the mid-1.16s and we note the potential for more meaningful support closer to the 200 day MA at 1.1633.”