Euro: Balancing pressures as Fed path repriced – OCBC

OCBC strategists Sim Moh Siong and Christopher Wong highlight EUR/USD caught between French political-fiscal risks and a potentially capped US Dollar. European bond turbulence is feeding expectations of a more dovish ECB, while US yields rise on economic resilience. Markets still price over three Fed hikes despite softer labour data, but OCBC expects only a moderate USD rally into year-end.

Euro weighed by bonds and Fed repricing

"The EUR remains under pressure as turbulence in European bond markets fuels expectations of a more dovish ECB path. However, the sharp safe-haven demand that supported the CHF late last week appears to be fading."

"Markets continue to price slightly more than three Fed hikes over the next 12 months, a path that looks too aggressive. Recent labour market data point to softer hiring and moderating wage growth, suggesting inflation pressures from the labour market are easing. If upcoming inflation releases confirm that underlying price pressures remain contained, markets may gradually scale back expectations for additional tightening."

"EUR/USD remains the key focus. Unless volatility in European bond markets escalates significantly, our base case is still for a moderate rather than aggressive USD rally into year-end."

"Expectations for an October Fed rate hike have fallen sharply after several Fed officials signalled there is little urgency to tighten policy further and stressed the need to assess incoming data before making another move. Recent comments from senior Fed officials have pushed markets to favour a pause in October, with any further tightening more likely deferred until later in the year."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)