The EUR/USD is recovering on Wednesday, trading near 1.0600, boosted amid a weaker dollar. The overall trend remains bearish. Analysts at MUFG Bank continue to see the pair with a bearish bias, expecting it to trade in the 1.0200/1.0800 range. They highlight that further upside could be unlocked if energy supply disruption fears are pared back, and details of the European Central Bank's anti-fragmentation plans are judged as credible by market participants. 

Key Quotes:

“Yield spreads between the euro-zone and US have been moving in favour of a stronger EUR as expectations for policy divergence have narrowed. Those expectations for more aggressive ECB rate hikes have been encouraged both by the Fed’s and SNB’s recent decisions to deliver larger 75bps and 50bps hikes. It has even prompted market participants to price in close to a 50:50 probability of the ECB kicking off their hiking cycle with a larger 50bps hike on 21st July. We see room for those hawkish expectations to be disappointed.”

“The EUR’s recent failure to rebound on the back of the hawkish repricing of ECB rate hike expectations and recent paring back of peripheral risks highlights that overall risks remain titled to the downside in the near-term. The price action suggests that euro-zone growth concerns continue to weigh heavily on the EUR especially related to fears over greater disruption to energy supplies in the region. Those fears have been reinforced by Russia’s decision to restrict gas supply to Germany and Italy. We are not expecting a significant improvement on this front in the month ahead.”

“The main upside risk to our bearish EUR/USD bias could be triggered by a paring back of energy supply concerns in Europe. While we think this is unlikely in the month ahead, the EUR appears well set up to stage a relief rebound if euro-zone growth concerns ease.”
 

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