Cautious EUR/USD Outlook Amid ZEW, Trade, and Oil Risks

EUR: ZEW might underwhelm

EUR/USD price action is so far endorsing our call that markets are not ready to take the pair much above 1.160 just yet. The upside risks aren’t small though, for instance, if markets are disappointed with the trade headlines from Canada and oil prices correct lower due to perceived abatement in the Middle East turmoil.

Yesterday, ECB Governing Council member Joachim Nagel briefly mentioned the oil rally as a potential risk to price stability, and otherwise reiterated President Christine Lagarde’s narrative that the ECB is in a good position with rates. But it is indeed oil prices that are likely to have the biggest impact on rate expectations at the moment. Unless Brent corrects further, markets may not really consider bringing the next cut forward to October.

The euro’s contribution to EUR/USD moves remains minimal, but today’s release of the ZEW survey in Germany can have some market impact. The “expectations” gauge is seen rebounding further to 35.0, but concerns about the EU-US trade standoff (albeit currently not the primary theme) could cap the upside.

We favour 1.15 rather than 1.16 as a near-term target and have a bearish bias on EUR/USD today. But the quite evident market preference to buy the dips in the pair means risks are still generally skewed to the upside.