EUR: A fiscal coalition of the willing – ING

As above, EUR/USD broke decisivley higher on prospects of a fiscal bazooka out of Europe. The speed with which the Europeans are moving is impressive, especially in Germany. Expect much focus now on whether the agreed fiscal changes in Germany move swiftly and easily through parliament over coming weeks. The prospect of large European stimulus is very present in European bond markets, where the German sovereign 2-10 year curve steepened a further 4bp yesterday, ING’s FX analyst Chris Turner notes. 

The prospect of large European stimulus is present in European bond markets

“In FX markets, we normally look at the combination of looser fiscal and tigter monetary policy as currency positive. The slight problem for the EUR/USD story here is that the fiscal news has not moved the needle on European Central Bank policy expectations. The forward ESTR curve still prices the low point for the ECB easing cycle near 1.75%. No doubt this is a function of the global tariff threat which looks like it will be coming Europe’s way next month.”

“We haven’t been calling for such a decisive upisde break in EUR/USD. We don’t yet buy into this talk of the dollar losing its reserve currency status. This looks more of a cyclical decline on soft US data this year. For the near term, however, US activity data will probably be the determinant of whether we trade up to 1.0670/80 today – or outside risk to 1.0800 were payrolls to miss by a huge degree on Friday.”

“And now looking at a multi-month view, our quarterly forecasts in the 1.00/02 area for the second and third quarter will be hard to achieve. Instead, EUR/USD maybe more of a 1.03/04 story when broader US tariffs come in next month.”