FxWirePro: Analyzing softness and hardness Euro fundamental drivers ahead of ECB and RV trades

The economy decelerated sharply in 1Q but truth be told it was the extent to which the data undershot expectations rather than the loss of momentum that did the most damage to EUR. In particular, data surprises collapsed to recessionary levels even though the overall GDP was at 1.5%. For 2Q we expect growth to rebound to between 2-2.5%.

EUR is starting to stabilize following the succession of economic and political shocks that triggered the abrupt depreciation from late April. Importantly, the region’s economy is regaining its composure following the stumble in 1Q and political risk has receded if not been fully eliminated as Chancellor Merkel has survived the immediate crisis over migration policy even as the Italian government weighs its fiscal strategy.

More importantly for EUR is the normalization in the flow of high-frequency data which has turned slightly positive and is on a par with US surprises for the first time since February.

By contrast, ECB policy has proved a modest disappointment for EUR as the last meeting deferred a hike until at least autumn 2019 even as QE is set to end this December, albeit subsequent commentary points to divisions in the council over the exact timing of the first hike.

The resumption above-trend growth in the Euro area is a key assumption in our moderately bullish EURUSD projections, not least as this would be essential to expose the inconsistency in the ECB’s dovish forward rate guidance.

The gap between the ECB's policy rate and an appropriate Taylor Rule rate will reach 300bp by the end of 2019, which is a huge gap. Already it is clear that not all ECB members are comfortable with its calendar-based guidance, and we would expect ECB rhetoric to evolve in a less dovish fashion assuming that the economy can get back on track, and stay there. Trade conflict is, of course, a risk to this benign economic scenario.

Relative value trades: Long EURUSD and short USDCHF in spot trades. Short GBP vs EUR and CHF in cash.

Euro area PMIs next week should confirm that the economy is tracking our baseline. Stay long EURUSD.

At the June monetary policy meeting, Norges Bank confirmed market expectations of a September rate hike, which, in our view, marks an important fundamental trigger for the next move lower in EURNOK. In the very near term, the global environment of weaker growth and trade war fears alongside improved structural NOK liquidity and summer trading should limit the short – projection profile to 9.40 in 1M (unchanged), 9.20 in 3M (9.30), 9.20 in 6M (9.30) and 9.10 in 12M (9.20). Courtesy: JPM

Currency Strength Index: FxWirePro's hourly EUR spot index has shown -88 (which is bearish), while AUD is flashing at -123 (bearish) while articulating at 09:01 GMT.

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