EURUSD rotation
EURUSD has made a dramatic U-turn from the inevitable grind lower to parity most analysts were predicting. A stronger Dollar come year end is still not being removed from the base case by most. However, its current momentum higher stands in defiance of that outcome. However, as we are seeing now, there are significant risks to the stronger Euro narrative that is emerging. EURUSD, whilst the most closely watched and heavily traded pair in the market, is remarkably useless at one thing: telling us anything about the value of the Euro and Dollar simultaneously. Despite pushing higher yesterday, a glance at other crosses reveals neither currency was favoured.
The rotation into the Euro was bolstered by a mildly hawkish ECB meeting last week. Thanks to a change of language in the policy statement, as expected, the market was left with the impression that the governing council believes interest rates are no longer significantly restrictive. Coupled with the expectation of a proliferation of German and European debt issuance, this policy shift reinforced the prospect of higher European debt yields. Most notably in the case of the Green’s party’s objection to Merz’s defence spending plans, the stronger Euro narrative is being challenged.
Critics of Germany’s Green party will argue that their objection to European defence spending is motivated by frustrations of not being involved in the fiscal design of the preliminary plans. Proponents of the Greens will argue that vowing to do whatever it takes on spending and defence without having formed a government yet and prior to becoming Chancellor is reckless. Regardless, on both sides of the Atlantic there are significant and fragile risks to both the Euro and Dollar that might be poorly identified within the spot value of EURUSD.
Discussion and Analysis by Charles Porter
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