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The euro was able to catch up significantly over the past few days. Things could look differently in the euro zone though. The ECB is only beginning to end its unconventional monetary policy. If the ECB really is aiming for a meaningful normalisation of interest rates this supports an attractive risk-reward profile for the euro. At its June meeting things had still looked differently in view of the large scope the ECB’s forward guidance left as regards the timing for the first-rate hike.
However, from the market’s point of view increasing signs of rising wage pressure which should then be reflected in the underlying price pressure have increased the likelihood that the ECB might normalise interest rates more quickly than expected after all. As it is decisive for individual market participants not to miss the moment when all the others consider the likelihood of a more aggressive ECB to be sufficiently high to buy the euro, small changes in the market environment can be sufficient to cause a EUR rally.
The EONIA curve is pricing a cumulative 20bp of hike by March 2020 and depo rate at 0% only by December 2020. Keep paying Mar20 ECB OIS.
Stay long Dec19 EURIBOR in the Jun19/Dec19/Jun20 fly, as a hedge against a late ECB policy rate lift off.
Keep 1) reds/5Y swap curve steepener and 2) paying greens in reds/greens/blues swap fly as bearish duration proxies; we also favour reds/10Y swap curve steepeners on carry and RV considerations. Courteys: JPM
Currency Strength Index: FxWirePro's hourly EUR spot index has shown -12 (which is neutral), while hourly USD spot index was at 28 (mildly bullish), while articulating at 14:01 GMT. For more details on the index, please refer below weblink:
