Euro: Yield spreads hint at recovery against US Dollar – MUFG
MUFG’s Derek Halpenny highlights that European Central Bank (ECB) minutes added little new information but confirmed openness to another rate hike, consistent with MUFG’s call for a 25bp move in September. Despite the Euro being July’s weakest G10 currency, a turning 2-year yield spread and potential US yield declines could support renewed EUR/USD upside in coming weeks.
ECB stance and yields guide Euro outlook
"The ECB will be certainly less concerned over longer-term inflation expectations becoming un-anchored with the 5y5y inflation swap rate having declined since the initial ceasefire was agreed."
"If crude oil and/or natural gas prices were to rebound sharply then risks will rise of course but at this point longer-term inflation expectations remain well anchored."
"In that context we see continued risks of the ECB acting again consistent with our current forecast of another 25bp hike in September."
"The euro is currently the worst performing G10 currency in July but the 2-year yield spread has started to turn in favour of some moderate EUR/USD recovery."
"We continue to see risks of US yields turning lower that should reinforce renewed upward momentum for EUR/USD."
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