EUR: The market has closed the door on further ECB hikes
Overnight, the European Central Bank's Isabel Schnabel said the ECB cannot close the door on further rate hikes, citing fragile inflation expectations and the risk of more geo-political supply shocks. However, the market has priced out any further rate hikes and is firmly looking at the 2024 easing cycle. This means that despite lower US rates recently, two-year EUR:USD swap differentials have not narrowed meaningfully and probably explains why EUR/USD is struggling to take advantage of the softer dollar environment. For reference, EUR/AUD has fallen 1% this week and macro traders will be looking for a big move lower here when they become confident of bullish steepening in the US curve. Given global conditions, however, we would favour EUR/USD towards the 1.0675/1.0700 today area unless US jobs surprise on the upside.
Chris Turner
In Sweden, the Riksbank will release FX hedging figures for the week 16-20 October this morning. FX sales numbers have been quite volatile and declined sharply from nearly USD 1bn to around USD 450mn total in last Friday’s report. We expect another uptick in FX sales today on the back of SEK underperformance in the week 16-20 October, which we think pushed the Riksbank to increase interventionism in the FX market. High FX sales are a SEK negative, and can favour another leg higher in EUR/SEK: we now see risks skewed to 11.85-11.90 in the near term.
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