Euro: Strong data and vigilant ECB support EUR – BNY

BNY’s Geoff Yu argues that resilient Eurozone data and a vigilant European Central Bank (ECB) now underpin the Euro, prompting a dial-back of earlier bearish EUR/USD views. Strong manufacturing PMIs, sticky input cost inflation and concerns over second-round effects and wages suggest the ECB may stay hawkish, while any unwind of EUR-funded carry trades could force investors to buy back Euro.

Resilient data and ECB caution

"We’re dialing back our view that the euro will weaken even as the economy strengthens. Resilient data and a hawkish ECB should put a floor under EUR for now, while a near-term reversal in October’s pro-carry flows into trades funded in European currencies would force investors to buy back EUR."

"Second-round effects will decide policy. Lagarde hedged her comments on second-round effects, noting that the central bank didn’t see a risk of them materializing “in addition to what is already included in the projections.” But the September baseline projections, which assumed a stronger EUR and lower energy prices than today, already showed non-energy industrial goods and services lifting inflation through H1 2027."

"Further upward revisions would push 2027 core inflation toward 3%, against the current 2.5% assumption."

"EUR can benefit as European funders recover. By design, when iFlow Carry significance reaches extremes based on rank correlations, there is scope for carry to mean-revert and unwind. The best risk-reward lies in currencies with the largest potential moves, assuming high-yielders begin to see net sales and funders net purchases."

"Our analysis shows that European funders had the worst flow performance over the past month and have the most to gain from a carry pullback. The EUR’s flow funding cost ranking (25 out of 32, where 1 is the highest flow score) is consistent with this view. If yields remain well anchored, or even rise, the currency’s flow performance could rebound sharply."

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