The euro (EUR) is modestly weaker, -0.3% vs. the USD. Despite the growth prospects, it still remains behind other G10 currencies, other than the CHF. Recent geopolitical developments are fast-tracking this trend. More importantly, with no big data drops on the radar, market sentiment is fairly insulated.
Since the end of June, the EUR has been mired in a narrow trading band. Today’s market conditions reflect a stunning deviation from the spot prices. Some analysts argue that this weakness is mainly sentiment-driven, more a reflection of what’s happening in many other economic indicators than any real fundamental change. The absence of impactful comments from European Central Bank (ECB) policymakers further contributes to the subdued outlook for the euro.
“Yield spreads are climbing and threatening fresh highs, delivering fundamental support to the EUR,” remarked Scotiabank’s Chief FX Strategists Shaun Osborne and Eric Theoret. In view of this supportive potential, the prevailing market sentiment is still bearish as traders reportedly wait for the forthcoming clarification to the key economic indicators.
This week, all eyes are on the preliminary euro area CPI figures. They are scheduled to be made public on Wednesday. In fact, analysts are looking for the euro area’s headline inflation rate to tick up to 2.0% y/y. This one figure would go a long way to establishing the economic stability and forthcoming influence future ECB policy decisions.
Traders are on edge about the short-term rates market. For the EUR, they don’t foresee on-hold policy turn with even next week’s CPI data. This continued rigidity in policy anticipations makes the developing set of economic indicators all the more crucial in determining market sentiment.
As geopolitical tensions continue to weigh on the euro’s performance, it remains to be seen how these factors will interact with upcoming economic data. The EUR’s flat range since late June masks its vulnerability. With the environment constantly evolving, sentiment can turn on a dime when new outside events occur.