EUR: Wider rate differentials and softer equities weigh
Yesterday's US CPI data briefly pushed EUR/USD two year swap rate differentials back to the widest levels of 2023. Add in a sell-off in equities and it was understandable that EUR/USD came under pressure. This means that EUR/USD continues to unwind the late 2023 rally and a break under 1.0700/0710 opens up 1.0660 and possibly even 1.0610. However, with Fed easing expectations moving back to more conservative pricing (and nearer to the Fed's own expectations of 75bp of easing this year) we suspect the 1.06/1.07 levels may be a good area for corporates to hedge long dollar or short euro exposure.
In terms of the calendar today, eurozone fourth quarter GDP for 2023 should be confirmed at 0.0% quarter-on-quarter and we have several European Central Bank speakers – split between the hawks and the doves. The re-pricing of the Fed cycle has also dragged euro short-term interest rates higher. This means that EUR:CHF two-year swap rate differentials have widened in favour of the euro and EUR/CHF has traded back above 0.95 again. We think this trend has a little more to go and had forecast 0.96 for the next few months.
Elsewhere, the UK has just released some welcome January CPI numbers, where headline and core figures have come in marginally lower than expected. The CPI services figure, which is closely watched by the Bank of England, has edged up to 6.5% YoY but remains lower than the 6.8% consensus. This softer data has helped EUR/GBP bounce off support at 0.8500 and sent GBP/USD under 1.2600 again. Look for testimony from the Bank of England's Andrew Bailey at 4:00pm CET, where he may shed more light on whether the BoE is confident enough to be cutting rates later this year. This probably should be seen as a negative event risk for sterling.
In terms of the calendar today, eurozone fourth quarter GDP for 2023 should be confirmed at 0.0% quarter-on-quarter and we have several European Central Bank speakers – split between the hawks and the doves. The re-pricing of the Fed cycle has also dragged euro short-term interest rates higher. This means that EUR:CHF two-year swap rate differentials have widened in favour of the euro and EUR/CHF has traded back above 0.95 again. We think this trend has a little more to go and had forecast 0.96 for the next few months.
Elsewhere, the UK has just released some welcome January CPI numbers, where headline and core figures have come in marginally lower than expected. The CPI services figure, which is closely watched by the Bank of England, has edged up to 6.5% YoY but remains lower than the 6.8% consensus. This softer data has helped EUR/GBP bounce off support at 0.8500 and sent GBP/USD under 1.2600 again. Look for testimony from the Bank of England's Andrew Bailey at 4:00pm CET, where he may shed more light on whether the BoE is confident enough to be cutting rates later this year. This probably should be seen as a negative event risk for sterling.
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