ING’s Chris Turner notes short-dated Euro swap rates have started to edge lower after a sharp spike, but real rate differentials have moved against EUR/USD. He argues this could be Euro-negative if the ECB refrains from an April hike while inflation expectations stay high. EUR/USD has support near 1.1440/70 but confidence in longs remains limited.

Real rate dynamics challenge EUR/USD recovery

"After a staggering 80bp spike this month, short-dated euro swap rates are now starting to turn a little lower. This is a global phenomenon as traders reassess whether central bankers will push ahead with rate hikes in economies operating with much more spare capacity than in 2022. That said, the retracement in euro swap rates has been pretty modest so far."

"... we made the case that the rise in nominal rates this month had barely offset the surge in inflation expectations because of the oil shock. And in fact, the two-year real swap differential has actually moved against EUR/USD."

"That could be tricky for the ECB if, as we expect, it refrains from a rate hike at the end of April and inflation expectations remain elevated. This could prove to be euro-negative."

"EUR/USD has found some support in the 1.1440/70 area and could get a modest lift should we receive any further reports of de-escalation out of Washington today. And the soft US consumer confidence reading could trigger a move back to the 1.1550 area. But until energy is freely flowing in the Strait of Hormuz again, we doubt investors will return to long EUR/USD positions with confidence."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)