EUR: Peak optimism still in the price – ING

As widely expected, the German Bundestag approved the debt break constitutional change yesterday. There are few doubts that fiscal reform will also make it through the Upper House (Bundesrat) and ultimately be signed into law. The euro has fully priced in the success of the spending reform and appears close to peak market optimism on the fiscal boost, ING's FX analyst Francesco Pesole notes.

EUR/USD to inch back below 1.090

"We must consider that Germany still doesn’t have a government, and coalition talks may prove tricky. Incidentally, while the debt break reform unlocks long-term fiscal spending opportunities, structural woes (competitiveness, innovation) are still to be addressed. Our view remains that the second quarter will bring a reality check for European optimism. With US tariffs likely to hit from the start of April, euro bullish momentum may well fade."

"The other key theme for the euro remains the direction of Ukraine-Russia peace talks. Yesterday, Russian President Putin agreed to reduce the number of attacks on Ukraine in a phone call with Trump. However, Putin is still requiring a complete halt to US armaments to Ukraine, and refusing to agree to a 30-day truce for now. Also on this topic, the euro is pricing in a good deal of optimism." 

"Should we see a truce finally being agreed, the extra support to the euro may not be substantial and probably quite conditional on the agreed terms. As we are bullish on the dollar ahead of today’s FOMC risk event, we renew our call for EUR/USD to fail a break above 1.100 and instead inch back below 1.090."