Euro: Early gains against US Dollar at risk on Fed story – ING

Chris Turner at ING highlights that EUR/USD has held up despite higher Oil, as Euro swap rates outperformed US rates on expectations of an ECB hike in September. However, he argues the Fed narrative will dominate, with EUR/USD likely to surrender gains and fall below 1.14. ECB minutes and energy prices should keep September hike expectations alive.

Resilience questioned as Fed dominates

"On the eurozone calendar today is the release of the ECB minutes for the 11 June meeting. We assume this will be pitched as hawkish and, combined with higher energy prices, keep expectations alive for a follow-up hike at the September meeting. That is currently priced at +22bp by money markets."

"EUR/USD has held up remarkably well given the jump in oil prices yesterday. Yield spreads did narrow in favour of the euro, where euro swap rates rose around 7-8bp more than short-dated US rates on the view that the ECB is more likely to pull the trigger on another hike in September."

"However, we think the Fed story will be a more dominant theme and can easily see EUR/USD handing back early gains today and sending the euro back below the 1.14 level."

"Could some of the EUR/USD resilience be down to President Trump mentioning Greenland again at the NATO conference? Remember that his threats back in January sparked a backlash against US asset markets from European investors. This link looks tenuous at best."