EUR: Could trade above 1.10, but a correction looks more likely
EUR/USD will have the chance to break above 1.10 this week, although we struggle to see the pair trade sustainably above that benchmark level just yet. The gap between market pricing on Fed tightening and the FOMC dot plot continues to leave room for hawkish repricing, while the EUR curve fully prices in two more hikes in the eurozone. Indeed, the OIS curve shows the September meeting has 38bp priced in and more upside surprises and/or hawkish ECB commentary could help markets fully price in a hike in September – but there is currently a smaller gap between markets and central bank communication in the eurozone compared to the US.
Our short-term financial fair value model shows that EUR/USD should be trading around 1.0800 based on current market conditions. As mentioned in the dollar section above, the dollar still needs to catch up with the rise in USD rates and that can prove to be a hurdle when attempting a decisive break above 1.10.
On the euro side, markets will watch the ZEW index this week after a long series of disappointing forward-looking indicators in the eurozone. On Thursday, the European Central Bank (ECB) minutes from the June meeting will be published.
We expect mostly USD-driven moves in EUR/USD this week, and see a greater risk of some pull-back towards 1.0800 rather than trading sustainably above 1.1000 – which could however be possible should US CPI surprise on the soft side.
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