Key data still to come
A stronger inflation print would certainly further increase pricing of a 25 bps hike on 26th July although with NFP next week, we would not expect a substantial shift in rate hike expectations. The market is currently priced at about an 85% probability of a 25 bps hike – so there is limited further scope for yields from here in pricing fully a 25 bps hike next month. The FX fallout will likely also be limited given the German inflation data yesterday saw the harmonised rate rebound from 6.3% YoY to 6.8%.
The US Dollar performance is likely to remain more mixed from here consistent with its performance through the first half of the year.
Near-term there are downside risks for EUR/USD but an active ECB and higher core inflation through the summer should provide support.
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