Euro: Inflation scare questioned as 1.13 level eyed – Societe Generale

Societe Generale’s Kenneth Broux and colleagues highlight softer Eurozone PMI price data and a dovish tone from European Central Bank (ECB) President Lagarde as key drivers for EUR/USD. They see the 1.13-handle as in focus, with support around 1.1390 and 1.1350. The widening 2y UST/EGB spread and stretched technicals frame risks of further Euro weakness against the Dollar.

Euro pressured by softer PMI prices

"Inflation scare over in the eurozone? 1.13-handle beckons for EUR/USD."

"S&P Global notes the following for the PMI: "There were signs of inflationary pressures easing in June. Although input costs continued to rise rapidly during the month, the rate of inflation eased to the slowest since February, just before the outbreak of war in the Middle East. Weaker increases in input prices were seen across both the manufacturing and service sectors, with the pace of inflation remaining sharper in the former. Cost inflation eased across Germany, France and the rest of the eurozone as a whole. In turn, the rate of output price inflation also slowed in June, albeit to a lesser extent than was seen for input costs. Here too, manufacturers continued to record stronger inflation than their services counterparts.""

"This will add some gravitas to the words uttered by ECB president Lagarde yesterday which relegated the euro to the worst performing G10 currency in the last 24 hours and caused the Bund curve to shift to bull steepening. Communication by the ECB has come under scrutiny in the past and the tone of Lagarde yesterday left a less hawkish impression compared to that of chief economist Lane last week."

"We’re not getting carried away, second round effects may yet take time to crystallise, but the bar was raised in the last 24 house and this morning for a second rate increase. The softening in PMI prices will help to cement that view."

"Back to EUR/USD, we are carefully observing the attempted breakout in 2y UST/EGB spread above 160bp (163.7bp). If money markets keep rowing back on ECB tightening, a retest of the March low at 1.1411 appears inevitable. Technicals are starting to look stretched but momentum could deflater the pair another leg towards 1.1350 area if 1.1390 gives way."

"Support 1.1345, resistance 1.1475."

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