FUNDAMENTAL FORECAST FOR THE EURO: NEUTRAL
- The Euro stabilized last week as the European Central Bank signaled that it would raise its main interest rate by July.
- The economic calendar offers few meaningful data releases; speeches by ECB President Christine Lagarde will garner the most attention.
- According to the IG Client Sentiment index, the Euro has a mostly mixed bias against its major counterparts.
EURO WEEK IN REVIEW
The Euro had a mixed week as the calendar flipped to June, faring better against safe haven currencies and worse against growth-oriented currencies. EUR/JPY rates led the way higher, surging by +2.77%, EUR/CHF rates gained +0.41%, although EUR/USD rates eased by -0.15% following the better than expected May US jobs report. EUR/AUD rates fell by -0.77%, EUR/CAD rates dropped by -1.16%, and EUR/NZD rates edged higher by +0.34%.
EUROZONE ECONOMIC CALENDAR BUSY ALL WEEK
The first full week of June sees a busier economic calendar for the Eurozone. Of course, many of the data releases are mere appetizers ahead of the week’s main course, the June European Central Bank rate decision on Thursday.
Here are the key events in the week ahead on the Eurozone economic calendar:
- On Tuesday, June 7, May Eurozone, French, German, and Italian construction PMIs will be released at 7:30 GMT.
- On Wednesday, June 8, the third estimate of 1Q’22 Eurozone GDP is due at 9 GMT, followed by a German 10-year Bund auction at 9:30 GMT.
- On Thursday, June 9, the June European Central Bank rate decision will be announced at 11:45 GMT, followed by ECB President Christine Lagarde’s press conference at 12:30 GMT.
- On Friday, June 10, the final May Spanish inflation rate (HICP) report will be released at 7 GMT. April Italian industrial production figures are due at 8 GMT.
ECB RATE HIKE EXPECTATIONS EVOLVE
The gap between the ECB and other major central banks’ rate hike odds that defined much of 2022 continues to close. Rates markets continue to price in the first 10-bps rate hike in July, after the ECB announces an end to its asset purchase program at its June meeting this week (when new Staff Economic Projections (SEP) are released).
But thanks to multi-decade highs in inflation pressures across the Eurozone (including in the bloc’s largest economy, Germany), rates markets are now discounting a 50-bps rate hike in December 2022, in what would be the largest single-meeting increase in rates since 2000.
FRENCH, GERMAN, ITALIAN, & SPANISH2-YEAR YIELDS (JUNE 2020 TO JUNE 2022) (CHART 1)
Elevated ECB rate hike odds continue to be reflected in the short-end of various European sovereign debt yields. The 2-year yields of the four largest economies in the Eurozone took another leg higher this past week: the Italian 2-year yield is at its highest level since December 2018; the French 2-year yield is at its highest level since May 2012; the Spanish 2-year yield is at its highest level since March 2014; and the German 2-year yield is at its highest level since October 2011. It remains the case that rising short-end bond yields should prove supportive of the Euro.
CFTC COT EURO FUTURES POSITIONING (JUNE 2020 TO JUNE 2022) (CHART 2)
Finally, looking at positioning, according to the CFTC’s COT for the week ended May 31, speculators increased their net-long Euro positions to 49,468 contracts from 36,630 contracts. Euro positioning is now net-long for four consecutive weeks, and positioning is the most net-long since mid-March when EUR/USD rates were trading around 1.1000.