Euro: Bond sell-off weighs against US Dollar – ING

ING’s Chris Turner argues that higher long-dated yields and elevated energy prices are negative for Eurozone growth and thus for the Euro. He expects the European Central Bank to keep sounding hawkish to avoid losing control of long-end yields. Turner warns that further bond selling could push EUR/USD toward 1.1570 and sees little case to add Euro longs now.

Higher yields pressure Euro prospects

"Given that the euro is a growth-sensitive currency, the short-term news flow has not been welcome. High energy prices and now higher long-dated interest rates are a headwind to growth. And China's April activity data appeared uniformly bad."

"Ideally, the European Central Bank would not be hiking into a stagflationary supply shock, but the risk of trying to look through a temporary inflation spike is the loss of control at the long end of the bond market. As such, the ECB will need to continue sounding hawkish, and the 75bp of ECB tightening priced into money market curves this year may endure – that is, unless something breaks."

"On the subject of growth, this week's economic calendar sees the flash PMI surveys for May, where the composite reading is expected to have drifted further into contractionary territory. We also have several ECB speakers this week, and perhaps Chief Economist Philip Lane's session in Frankfurt tomorrow might be the first opportunity to hear what the ECB thinks of the recent bond market sell-off."

"Expect much focus on the long end of the bond market today, with any further sell-off driving EUR/USD down to 1.1570. The case for restocking on EUR/USD longs right now has yet to be made."

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