The recent rebound in the EUR:USD 2-year swap spread may hit a roadblock around -100bp, according to ING’s FX strategist Francesco Pesole. Despite softer risk sentiment in global stocks, Pesole believes that EUR/USD could continue trading above 1.10.
Breaking Above 1.10 Is the Target
Pesole explains, “Markets may not react strongly to the hawkish re-adjustment in Fed expectations, but ECB pricing could see more movement. The EUR OIS curve currently reflects 69bp of easing, mostly influenced by Fed pricing. Recent eurozone inflation data suggests that the ECB may not cut rates in September.”
He adds, “The risks lean towards a 50bp adjustment rather than 75bp by the ECB in the next three meetings. We anticipate EUR/USD to test 1.10 before the US CPI report next week.”
Furthermore, Pesole states, “We also predict a continued rebound in Norway’s krone and Sweden’s krona, along with other high-beta currencies. The Norwegian krone has been hit hard by the recent equity sell-off and has room for recovery before the upcoming Norges Bank meeting, which may not support the market’s bearish outlook as policymakers focus on stabilizing the currency.”
Analysis:
In summary, the EUR:USD 2-year swap spread rebound may face resistance around -100bp, with EUR/USD likely to stay above 1.10. The ECB’s actions and market expectations will play a crucial role in shaping the currency pair’s movement. Additionally, high-beta currencies like the Norwegian krone and Swedish krona are expected to strengthen, driven by market dynamics and central bank policies.