Credit Agricole

Asia overnight

Again, price action was pretty subdued in the G10 FX space overnight, as the USD consolidated its resurgence of the day prior. It was at least until the first regional CPI estimate coming from one of the German Lander this morning. The EUR indeed dipped on the back of a surprising fall in consumer prices this month, although we would caution whether the market consensus had well discounted the measures recently implemented to tackle surging transport costs. Elsewhere, USD/JPY has steadied around 136 despite the modest slippage in UST yields and the equity losses, while the slight miss in the Japanese retail sales was easily shrugged off. In contrast, Australian retail sales kept growing at a frothy 0.9% MoM pace in May (vs 0.4% expected), which nonetheless did not translate into a material lift for the AUD as AUD/USD is holding up just above 0.69.

EUR: can we still trust the ECB?

The EUR’s good start to the new week has seemingly come to a premature end in the wake of the opening speech by ECB President Christine Lagarde yesterday at the ECB Forum on Central Banking in Sintra as well as on the back of returning concerns about the Eurozone economic outlook. In particular, Lagarde’s comments suggested that the ECB has made little progress on its anti[1]fragmentation tool since the tool was first announced at its June policy meeting two weeks ago. Indeed, we continue to think that the ECB’s ability to contain any further sell-off in the Eurozone periphery will remain a key determinant of the EUR’s near-term outlook given that the rates markets have already priced in a significant portion of the upcoming ECB monetary tightening. All that being said, we further note that the reaction in the EGB and the Eurozone rate markets to Lagarde’s speech has been rather muted with the EUR-USD rate spread still close to recent highs and the peripheral yield spreads to Bunds still close to recent lows. We therefore think that the latest EUR/USD price action in particular could be further driven by month-end rebalancing flows that according to our model should be dominated by USD-buying.


European Open

Markets were calm following the European close, with dollar holding onto gains. Aussie retail sales came in higher than expected, while Korea saw news from Bloomberg today, citing Yonhap, that the BoK will weigh a ‘Big Step” rate hike if June CPI hits 6%. Nearer to the European open, we received a disinflation signal in the form of German regional (NRW) CPI, although we do note that we would not read too much into it given that the Saxony print is more highly correlated with the headline CPI. Nevertheless, German 10y bund futures jumped, while the UST curve sits 4-5bps lower.

Central bank speak from Sintra looms today, featuring ECB, BoE and Fed speakers. For EUR, focus will once again be on fragmentation tool details, especially after yesterday’s report from Reuters. GBP will watch Bailey, as unscripted comments from the governor tend to be more informative on his views. Fed Chair Powell is not expected to alter his rhetoric of late despite the downward revision to University of Michigan inflation expectations. Elsewhere, we will watch the German CPI prints, Eurozone economic confidence data, and SEK’s economic tendency survey. BRL will watch inflation prints for June.