Euro: ECB hawkishness fails to lift versus US Dollar – Societe Generale

The report by Societe Generale notes that Eurozone yields are slightly firmer after hawkish comments from ECB member Schnabel, who highlights rising medium-term inflation expectations and signals a likely rate hike in June. Despite a modest narrowing in the 2-year US/EU spread, EUR/USD remains anchored around 1.1600–1.1645 by large option expiries. Upcoming inflation data in US and Eurozone will shape Fed and ECB decisions.

Range-bound trade persists on ECB hawkish tone

"Yields are fractionally firmer into the early open this morning, reacting to the hawkish comments by ECB member Schnabel (hawk). In her interview with Reuters, she warns about the rise in inflation expectations over the medium term in the CES survey. "

"Given the size and the persistence of the current shock, she insists that looking through is no longer an option and a rate hike in June will be needed to deal with the risk of a de-anchoring of inflation expectations."

"Even if the culprit this time is a negative supply shock and means that the eurozone economies (ex-Spain) will grow below potential this year, the ECB is guided by the trauma of 2022 (demand driven) and determined to take out insurance, adding to the burden of businesses and households."

"The modest narrowing in 2y US/EU spread isn’t helping the single currency as large option expiries exercise gravitational pull in EUR/USD between 1.1600-45."

"Euro offered inside yesterday’s range as touted progress on peace deal is challenged. Support 1.1570, resistance 1.1700."

"Aside from geopolitics and oil, inflation data on both sides of the Atlantic takes centre stage this week and will influence thinking at the Fed and ECB in June and beyond."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)