Euro: Energy and spreads shape near-term path – ING

ING’s Chris Turner highlights that with Brent above $90, EUR/USD might normally trade below 1.14, but tighter correlation between energy and short-dated Euro swap rates is offering support. ING still favours EUR/USD slipping back under 1.14, eyeing 1.1380 this week, while flagging a risk of a surprise European Central Bank rate hike. EUR/NOK downside toward 10.95 is also projected.

High energy collides with ECB risks

"With Brent back above $90/bbl, we would have expected EUR/USD to be trading under 1.14. However, it may well be the tighter correlation between energy and short-dated euro swap rates that is proving a supportive factor for the euro."

"Here, as in March, higher energy prices have driven quite a sizeable narrowing in the EUR/USD two-year swap spreads. Two-year EUR swap rates are now trading at a new high for the year, while last week's US inflation data has left short-dated US rates off their highs."

"We do favour EUR/USD moving back below 1.14 on these high energy prices, but we are cognisant of the risk of a surprise rate hike from the European Central Bank this Thursday."

"The macro team's view is that the ECB might take the opportunity of higher energy prices to get a second hike in earlier than September. That is more the risk than the baseline view, and instead, we suspect the run-up in energy prices can push EUR/USD back to 1.1380 this week."

"Elsewhere, the high-yielding, energy-exporting Norwegian krone has come back bid after a little wobble last week. EUR/NOK losses can extend to the 10.95 area."