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Yesterday’s weak PMI prints for May question the thesis that the weather was the primary contributor to weak euro area growth in Q1, according to analysts at Nomura.

Key Quotes

“We are hesitant about exiting our long euro trades as pricing for ECB hikes next year has been lowered, while ECB rhetoric still appears to be in the direction of normalisation of policy. On top of that, next week we get the May print for inflation, which should see a sharp pick-up. Then on Italian risks, the euro’s correlation to Italian spreads has moved from consistently negative (i.e., higher spreads = lower euro) to more mixed since 2015. This is partly due to ECB measures that limited contagion risks across the bloc, but also the switch in the current account balance from neutral to surplus, which meant that euro-area investor repatriation could swamp any foreign investor outflows during a crisis. Given all this, we’ll wait for next week’s CPI print before deciding whether to exit our long EUR positions.”