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Skew in options remains for euro weakness in near term – SocGen

Analysts at Société Générale summarize the near term developments in the FX market and take a look at the upcoming events.

Skew in options remains for euro weakness in the near term

"The positive risk mood carried over for a second day in China this morning and 2y UST yields returned below 5% following decent Treasury bond auctions last night, especially for the 2y. European yields are playing catch down with the US and EUR/USD is tentatively trying to pull away from the 200dma (1.0807) but without great conviction it must be said."

"The skew in options remains for euro weakness in the near term though risk reversals have stabilised on the lows. ECB hawk Holzmann sided with Nagel in comments yesterday, declaring that the central bank has not defeated inflation and barring a (downside) surprise on inflation, it probably needs to raise interest rates again in September."

"Our economists pencil in a modest drop in core CPI to 5.4% yoy from 5.5% when data is published on Thursday but do not rule out a decline to 5.3%. This may not be enough to appease the council hawks, however, who may prefer a figure below 5% before ceding ground to the doves. A (final) increase in the depo rate to 4% in two weeks could be inevitable and leaves the front end of the European curve and ESTR vulnerable to hawkish repricing from the current 10bp."

"Preliminary data for Germany and Spain tomorrow will kick off the monthly inflation data series and will compete with US ADP employment. The convergence with 2y2y US/EU forwards puts EUR/USD on a neutral footing and in holding pattern until the release of euro CPI and US NFP."

Author

Eren Sengezer

As an economist at heart, Eren Sengezer specializes in the assessment of the short-term and long-term impacts of macroeconomic data, central bank policies and political developments on financial assets.

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