Fundamental forecast for the euro: neutral
- The euro stabilized last week when the European Central Bank signaled a rise in key interest rates by July.
- The Economic Calendar offers several significant data releases; The speech of the ECB President Christine Lagarde will attract the most attention.
- According to IG Customer Sentiment Indexthe euro has a largely ambiguous bias towards its main counterparts.
Euro Week Review
The euro was an ambiguous week when the calendar turned to mid-May, but there is evidence that the worst could be over in terms of stable sales, which have so far determined 2022. The European Central Bank signaled a rate hike earlier than previously discussed (more on this below), European bond yields rose, becoming a cushion for the taxed euro. EUR / USD rates increased the package higher, gaining + 1.45%. EUR / JPY by the end of the week rates had abandoned most of the increase, but still added + 0.35%. Elsewhere, EUR / GBP rates fell -0.41% and EUR / CHF rates fell by -1.20%.
Eurozone Economic Calendar Quieter
While markets – especially commodities – continue to focus on Russia’s invasion of Ukraine and its detrimental effects on the European economy, attention should return to data release in the coming days, even if there are only a few significant releases.
Here are the key events for next week in the eurozone economic calendar:
- A meeting of the Eurogroup will be held on Monday, May 23, and the 8th study on Germany’s Ifo business climate will be published on the 8th of Greenwich Mean Time.
- On Tuesday, May 24, at 7:15 Greenwich Mean Time, the May PMI of Production and Services in France is to take place (flash), followed by the 7 May of Greenwich Mean Time followed by the May PMI of Production and Services in Germany, followed by 7:30 Greenwich Mean Time. to be shown the May PMI production and services of the Eurozone. (flash) at 8 GMT. The meeting of Ecofin (Council for Economic and Financial Affairs of the European Union) will start at 8 GMT. ECB President Christine Lagarde will speak at 18 GMT.
- On Wednesday, May 25, the final report on Germany’s GDP for the 1st quarter of 2022 will be published in 6 Moscow time. ECB President Lagarde will speak again at 8 GMT.
For complete Economic eurozone forecast data, view DailyFX Economic Calendar.
The increase in the ECB rate is delayed
How quickly things can change. At its meeting in late April, the European Central Bank suggested that the cessation of stimulus efforts in the 3rd quarter of 2222 remains the most likely course of action, followed by a rate hike shortly thereafter. But as the Russian invasion of Ukraine progressed, inflation intensified, requiring a rethinking of various members of the Board of Governors.
Earlier in MayECB President Lagarde has said he will support raising the 10 bp rate in July, followed by similar comments from ECB Governing Council member Mario Sentena last week. Member of the Governing Council of the ECB Klaas Nott went a little further, believing that the rate increase by 50 b.
This means that the gap between the ECB’s expectations and the rate hike has narrowed and the market has won. It now appears that the ECB will complete the asset purchase at its next meeting in June, paving the way for tightening policies in July. More importantly, as the ECB weakens under inflationary pressures, markets now predict that faster rates will increase during 2022.
French, German, Italian and Spanish 2-year returns (May 2020 to May 2022) (Chart 1)
The main effect on the rise ECB course The increase in chances can be seen in the short-term profitability of various European sovereign debts. Among the four largest economies in the eurozone, there is a rapid growth in 2-year profitability: Italy’s 2-year profitability is at its highest level since December 2018; the French 2-year yield is at its highest level since April 2014; the Spanish 2-year yield is at its highest level since March 2014; and Germany’s 2-year yield is at its highest level since October 2011. Growth in short-term bond yields should be supported by the euro; if not lead to an increase in strength, then at least help stop some of the recent weaknesses that were observed during the 2nd quarter of 2222.
CFTC COT Futures in Euro (May 2020 to May 2022) (Chart 2)
Finally, looking at positioning, according to the CTC CFTC the week is over May 17 speculators increased their net long-term positions in euros to 15,804 ccontracts of 10,572 contracts. Positioning in the euro now lasts for two weeks in a row after the beginning of the month briefly turned into a territory with a short volume.
— Written by Christopher Vecchio, CFA, Senior Strategist