In view of the analysts at Nomura, EUR momentum has remained strong after EUR/USD initially dropped post the second round of the French Presidential election as profit-taking took place, but has recovered swiftly as higher EUR rates have supported the currency.
“Interestingly, EUR/USDs correlation with the long end of the rate spread has been rising. Position adjustments around French political risks in FX and rates markets may explain part of this. However, as occurred after the US taper tantrum, the currency may become more highly correlated with the move in term premium as normalisation approaches.”
“We think ECB forward guidance will be more data-dependent and as a result, EUR will be more sensitive to better euro area data. At the next meeting, the ECB is likely to take steps towards normalisation and EUR will likely trade strongly into the meeting.”
“The long end of the curve has been more of a driver for EUR than normal
US data releases have been mixed recently, with the surprise indices turning negative. Meanwhile, euro area data continue to strengthen, and this explains why there are increased market expectations for ECB normalisation. Interest rate differentials have been widening as a result in EUR’s favour, while recent political headlines also support EUR outperformance against USD. Interestingly, the currency move has been more than the typical front-end rates spreads would imply.”
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