Societe Generale’s Kit Juckes notes that the Euro (EUR) has shown limited reaction to comments from Isabel Schnabel about a June European Central Bank (ECB) rate hike, even as markets price in more tightening. With Eurozone Gross Domestic Product (GDP) forecasts at 0.8% versus 2.1% for the United States (US), he expects EUR/USD to stay rangebound, projecting 1.14 by year-end with upside risk toward 1.18.
Euro stays rangebound despite ECB pricing
“Isabel Schnabel told Reuters that the ECB should raise interest rates in June, even if ongoing peace talks with Iran yield a deal, as the conflict has been far longer than projected and high energy prices are spilling into the broader economy.”
“The euro hasn’t really reacted though the rates market now prices 23bp of hikes at the June 11 ECB meeting.”
“With the consensus forecast for Eurozone GDP this year down to 0.8%, the contrast with the US (2.1% GDP growth and a rate hike not fully priced before next year) remains striking.”
“Still, CFTC EUR/USD positioning has settled to a modest-sized euro long, after a very sharp drop in February/April, and it will take a reasonably large surprise to trigger a move outside the current range.”
“Our forecasts look for a fall to 1.14 by the end of this year, but we’re conscious that a credible extension of the cease-fire (plus increased traffic through the Strait) could initially send EUR/USD back up towards 1.18.”
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