EUR/USD Nears 1.0660 as ECB's Lagarde Takes the Stage

EUR: Lagarde to speak today

The dollar’s bounce sent EUR/USD back close to the 1.0660 mark, and we cannot exclude a bit more pressure as the impact of yesterday’s US bond sell-off might be felt across European markets today. The EUR-USD 2-year swap rate differential has rewidened after yesterday’s events and is now close to the 136bp pre-FOMC low.

Today's focus will be on a speech by European Central Bank (ECB) President Christine Lagarde in London. A slow shift from trying to convince markets another hike is a possibility (like in the US, investors remain hard to persuade) to pushing back more directly against rate expectations may start to appear more clearly in ECB members’ remarks. The EUR OIS curve prices in a first cut between April and June. The impact on the EUR from ECB speakers has been, however, quite modest and we doubt that would change in a very short time.

Elsewhere in Europe, the UK released third-quarter growth data this morning. GDP was a tad better than expected for the third quarter as a whole, coming in flat, but this was entirely due to a fall in imports. In reality, the domestic elements of GDP were negative, and strike activity earlier in the summer is a key factor. In the bigger picture, the UK economy hasn't really grown this year in level terms. Our base case is stagnation/modest growth, but a recession can't be ruled out. Ultimately, the BoE won't be paying these figures too much attention, with the focus instead on next week's services inflation and wage growth figures.