US inflation print failed to provide a sustained improvement in investor sentiment in Asia. Investors potentially view the inflation data as not being weak enough to immediately change the outlook for the Fed. US President Donald Trump’s threats of retaliatory tariffs against the EU’s counter tariffs to the US steel and aluminium tariffs are also weighing on sentiment.
At the time of writing, Asian bourses were trading mixed and S&P 500 futures were in the red. Weakening investor sentiment led to outperformance by the JPY and CHF during the Asian session. Higher UST yields, despite the soft US inflation print, supported the USD. The risk-sensitive Antipodean currencies and the CAD were the underperforming G10 currencies during the Asian session.
Greens' shoots The EUR continues to trade close to recent highs across the board as FX investors remained focused on the prospects for aggressive fiscal spending in Germany and the EU in the coming quarters as well as a potential ceasefire in Ukraine. The single currency is further supported by the unwinding of EUR shorts in FX markets as well as portfolio rebalancing by global equity investors that are correcting their underweight in European stocks. The prospect for a trade war between the US and the EU has not deterred EUR/USD buyers either. This is mainly because FX investors see the latest developments as fuelling US recession risks more than anything else, in a blow to the USD. Last but not least, while we believe that a US government shutdown would be averted ahead of tomorrow’s deadline, market uncertainty continues to weigh on the USD.
All that being said, we believe that a lot of positives are already in the price of the EUR because: (1) any aggressive fiscal spending may have an initial growth- negative impact if the EU countries would have to import military and defence equipment that they do not have the capacity to produce at present; (2) defence and infrastructure spending could boost domestic demand but also fuel commodity imports and gradually use up the Eurozone’s excess savings at a time when trade wars further hurt Eurozone exports; and (3) the surge in government borrowing needed to fund the fiscal stimulus packages could worsen the credit rating outlook of Eurozone governments if the fiscal multiplier effect is very slow to materialise.
In the very near term, EUR investors will also focus on the efforts of the CDU/CSU and the SPD parties in Germany to push through the Bundestag the proposed reform of the so-called ‘debt brake’. In recent days, the Green party has made a number of demands in exchange for their support that would allow the CPD and the SPD to secure a special parliamentary majority in favour of the legislation. The first reading of the bill will take place today and would be seen as an important stepping stone on the way towards a debt brake reform. Also today, FX investors will focus on speeches by the ECB’s Joachim Nagel, Olli Rehn, Luis de Guindos, Francois Villeroy and Robert Holzmann as well as the latest newsflow on Ukraine and US tariffs. In all, while the pervasive bearish USD sentiment could continue to support EUR/USD for now, we think that many positives are in the price by now.
