Analysts at Nordea Markets suggest that for EUR/USD, the FOMC meeting will likely play a secondary role compared to the ECB meeting the following day.
Key Quotes
“The focus on symmetry around the inflation target in the recent FOMC minutes has maybe counterintuitively played a pivotal role in the USD comeback that we have seen since the end of April.”
“The rates spread that has had the best ability to explain EUR/USD moves since mid-2016, is a 10yr spread between US and Germany adjusted for a 3month rolling EUR/USD hedging cost. A relatively flatter USD-curve (10yr-3m) has coincided with a weaker USD and vice versa. The willingness to allow US inflation to overshoot the target temporarily has been one of the factors behind the recent relative re-steepening of the USD curve versus the European one. If Powell and the FOMC continue down the road on Wednesday by indicating continued short-term tolerance towards inflation overshooting, this could prove further USD positive over the summer through an even wider core inflation spread between US and the Euro area.”
“On the other side of the EUR/USD equation, we see no reason to expect the ECB to take a dovish turn due to the recent turmoil in Italian bonds. One could actually rather build the case that the latest developments in Italy could tempt the ECB to turn more hawkish, as I) the EUR has weakened as a result of the Italian turmoil and II) The ECB could be interested in sending a signal to the new Italian government to prevent moral hazard issues. And even with the recent substantial Italian bond sell-off the average 10yr government bond yield in the Euro area is still below the most recent ECB assumptions (i.e. no bond yield reasons to turn dovish either).”
“EUR/USD could likely reach levels close to 1.19 this week on the combination of Trump risks and the “June is live” mood surrounding the ECB meeting and we would in such case use those levels to re-enter EUR/USD shorts. Should 1.1950 be breached on the topside, it could be a technical game-changer and in such case we would consider reversing our EUR/USD recommendation.”
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