Fiscal concerns weigh on the euro (again)

As expected, fiscal worries remained the dominant market theme in the week just gone, with government bonds setting the tone for currency price action. Europe continues to be central to market concerns, with France in the crosshairs, though rising yields across DM economies again favored dollar upside, with the euro simultaneously under pressure. That has left EURUSD hugging the 1.12 mark to close out the week, a 16-month low for the pair. A light data calendar has offered little relief, with central bank speak also having minimal impact, one comment from ECB President Lagarde aside, noting that the bank has the necessary tools to counter unwarranted market dynamics. While not quite a “whatever it takes” moment, that intervention has helped to arrest the euro’s slide heading into the weekend.

Whether that line holds in the coming week is likely to be key for FX. The data calendar is again sparsely populated, albeit headlined by Australian jobs data and US CPI. The latter, in particular, could compound the euro’s worries if the data prompts a reacceleration of Fed tightening bets. That said, we look for an in line print on this occasion, meaning minimal change in market expectations, which could allow French fiscal worries to cool a little. That would provide a path higher for the euro, albeit possibly at sterling’s expense, with the UK's month-end budget the next big fiscal event of note. If traders start to shift their focus, we expect downside pressure on the pound as speculation builds.

You can read the Week Ahead in full here:

Authors:

Nick Rees, Head of Macro Research

Barry van der Laan, Senior FX Market Strategist

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