Credit Suisse economists expect the EUR/USD to remain in a slight downtrend in Q3, with an asymmetry to a further widening of the short-end rate gap in favor of the USD – their predicted Q3 range is 1.16-1.22, and they like to sell rallies towards 1.20. Tighter long-end spreads, on the other hand, reduce the possibility of EUR suffering larger losses.” In late summer, PEPP purchases of around EUR20 billion per week may decelerate due to seasonal issuance issues. However, we believe that a dovish core message will be delivered at the ECB meeting on July 22nd, ahead of the ECB’s Strategy Review in the autumn.”
“Even if it doesn’t develop into Fed-style average inflation targeting, the Strategy Review could see a shift toward a more symmetric inflation target around 2%. It appears prudent to avoid disinflationary mishaps before that moment due to a rate or EUR spike.”
“As the EU attempts to build a benchmark for what may be a permanent future EU yield curve, the NextGenerationEU bond issuance program has gotten off to a strong start, aided by generous pricing for AAA-rated paper. At prices near EUR/USD 1.1600, this provides psychological and material support for the EUR.”
“The German elections in September are expected to produce a government with traditional policies, making them an FX non-event. The French elections in Q2 2022 offer further intrigue, but they are too far away to matter for now, especially given Le Pen’s RN’s recent regional election setback.”/n
