FX Market Buzz: Saudi Oil Cuts Amplify Currency Concerns

EUR: EUR/USD looks vulnerable

We are increasingly hearing the term 'stagflation' to describe the Eurozone economy. As a growth-sensitive currency, stagflation is bearish news for the euro and was one of the key factors weighing on it at its birth in 1999. Adding to that story is now the supply-driven spike in energy, reviving fears of last summer's negative terms of trade story for the euro. In practice, that meant the eurozone's traditional trade surpluses turned into deficits and the euro got hammered. With natural gas prices still very subdued, this energy story will not hit the euro as hard as last year, but it remains unwelcome.

Regarding European Central Bank (ECB) policy, the market prices just a 25% probability of a 25bp hike next week. We think the chances are much higher than that. However, speculative positioning and the energy story leave EUR/USD in a vulnerable position and EUR/USD could easily slip through support at the 1.0700 area in a move to the 1.0635/40 area.

Elsewhere in Europe today, we should see the start of an easing cycle in Poland. The move looks well-telegraphed and perhaps should not weigh too much on the zloty. However, the softer EUR/USD story and higher oil prices look to keep the zloty on the back foot near term.