EUR: Range-bound Outlook Amid Tightened Swap Rate Gap

EUR: Range-bound for now

The EUR-USD two-year swap rate gap tightened for a third consecutive session yesterday, although by quite negligible amounts (-146bp to -140bp) compared to the massive rewidening experienced throughout July (where it had reached a -100bp peak).

Despite the benign US disinflation story, it is no surprise that markets are not flooding long EUR/USD positions. That has been an already relatively crowded trade, and the recent re-pricing of growth expectations of both growth and rate expectations in the eurozone is weighing on the euro’s attractiveness. EUR/USD looks likely to keep trading range-bound (1.09-1.11) until signs of a US economic slowdown move the rate differentials back in the euro’s favour.