The EUR is having one of its best weeks in recent years. Its spectacular run of gains is fuelled by market hopes that a combination of ramped up defence spending and growing prospects for an end of the war in Ukraine could boost the appeal of the EUR-denominated stocks and bonds. Today, EU leaders will gather in Brussels for a special summit to discuss European defence among other topics.
Ahead of the summit, the European Commission President Ursula von der Leyen has floated a proposal for a EUR150bn package to boost military spending. Furthermore, consensus has been growing in Germany in support of plans to boost defence and infrastructure investment. We doubt that today’s EU summit would have a meaningful impact on market expectations and therefore think that some positives are already in the price of the EUR.
Intensifying market expectations of growing defence spending in Europe have encouraged European rate investors to reassess their dovish ECB outlook. As a result, at the time of writing, markets are fully pricing in a 25bp cut at today’s policy meeting but they only expect a total of c.-70bp of easing in 2025 – compared to c.- 85bp at the start of the week. We expect the Governing Council to cut its rates by 25bp today but signal that its policy stance is no longer as restrictive. This, coupled with an upward revision of the bank’s inflation forecasts could mean that ECB President Christine Lagarde could sound even more non-committal to future rate cuts.
A ‘hawkish’ cut from the ECB should help reduce the rate disadvantage of the EUR some more. We think that the EUR-USD rate spread has already corrected considerably to the upside, however, and the move is starting to look excessive in part due to the market’s overly dovish Fed expectations at present.
Our fair value analysis further suggests that EUR/USD is trading broadly in line with the EUR- USD rate spread. In all, we think that EUR/USD would struggle to break higher in the absence of meaningful hawkish surprises from the ECB. At the same time, evidence that the Governing Council continues to worry about the outlook could trigger a bout of profit taking on tactical EUR-longs across the board.
Ahead of the summit, the European Commission President Ursula von der Leyen has floated a proposal for a EUR150bn package to boost military spending. Furthermore, consensus has been growing in Germany in support of plans to boost defence and infrastructure investment. We doubt that today’s EU summit would have a meaningful impact on market expectations and therefore think that some positives are already in the price of the EUR.
Intensifying market expectations of growing defence spending in Europe have encouraged European rate investors to reassess their dovish ECB outlook. As a result, at the time of writing, markets are fully pricing in a 25bp cut at today’s policy meeting but they only expect a total of c.-70bp of easing in 2025 – compared to c.- 85bp at the start of the week. We expect the Governing Council to cut its rates by 25bp today but signal that its policy stance is no longer as restrictive. This, coupled with an upward revision of the bank’s inflation forecasts could mean that ECB President Christine Lagarde could sound even more non-committal to future rate cuts.
A ‘hawkish’ cut from the ECB should help reduce the rate disadvantage of the EUR some more. We think that the EUR-USD rate spread has already corrected considerably to the upside, however, and the move is starting to look excessive in part due to the market’s overly dovish Fed expectations at present.
Our fair value analysis further suggests that EUR/USD is trading broadly in line with the EUR- USD rate spread. In all, we think that EUR/USD would struggle to break higher in the absence of meaningful hawkish surprises from the ECB. At the same time, evidence that the Governing Council continues to worry about the outlook could trigger a bout of profit taking on tactical EUR-longs across the board.
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1. AccuTrade System:
tradingview.com/v/yDFPnb1J/
2. Signal Performance:
thedailyfx.com/performance/
3. We provide Free TradingView Premium and Essential Membership.
tradingview.com/v/yDFPnb1J/
2. Signal Performance:
thedailyfx.com/performance/
3. We provide Free TradingView Premium and Essential Membership.
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.