Date: 29 Jun 2018

Though it matched the consensus expectation of economists polled by Reuters, Thursday’s 2.1 per cent print for German inflation in May arguably gave the euro (EURUSD) something of a fillip, while the fact that US Q1 GDP growth was marked down to a 2.0 per cent rise from a prior 2.2 per cent estimate was hardly conducive for USD strength. Nevertheless, traders will no doubt be conscious that the ECB has already made it known that it doesn’t envisage raising rates (remembering that its current benchmark is still at minus 0.4 per cent) until after summer 2019. In that sense euro zone inflation data is somewhat secondary. Of course euro bulls could, and likely would, point to a slight downtick in 10-year US yields as less of a reason to favour the USD especially when that is viewed in correlation with data such as Thursday’s US Q1 GDP figure. But what’s driving slightly lower US yields given the market knows the Fed currently feels 4 rate hikes in 2018 will be appropriate? There is an argument that with weakness among emerging market currencies such as the Chinese yuan (USDCNH) and the Indian rupee, capital that is coming out of such economies might be being parked in the safe haven of the US Treasury market with a relatively attractive positive pick up.  If that is the case, or more particularly if the market decides that is the case, then it could be tough for the euro to gain too much traction versus the greenback. But in the meantime, given how, in the Asian session, it’s undeniable that the euro responded positively to news today of a European Union-wide deal on migration. Traders might, however, wonder if a concentration of expiries (xxx) will bracket activity in EURUSD until expiry at 1500h London time, with IFR analysts having identified EUR 2 billion of expiries at 1.1600 today, EUR 1.4 billion over the 1.1610-40 range, EUR 1 billion between 1.1665 and 1.1680 and almost EUR 1.7 billion at 1.1695-05.

Written by Neal Kimberley, External Currency Analyst.