The Euro (EUR) is extending its latest consolidation and trading within a tight range in the mid/lower-1.16 area, Scotiabank's Chief FX Strategists Shaun Osborne and Eric Theoret report.

ECB policy divergence supports bullish Euro outlook

"The outlook for relative central bank policy remains bullish for the EUR, as comments from ECB President Lagarde have hinted to bullish revisions to the central bank’s forecast. The ECB will publish its latest economic projections at next Thursday’s meeting, where a widely anticipated hold is likely to be paired with a modestly hawkish tone. A growing number of ECB policymakers have recently shifted their communication from neutral, introducing upside risk to the rate path."

"Short-term rates markets have adjusted, with swaps now pricing a 50% chance of 25bpt hike by December 2026. Near-term risk lies with the Fed, where a dovish cut will only serve to underscore the divergence in Fed/ECB policy. We also note the reemergence of political uncertainty in France, where the government is once again struggling to adopt its budget. French-German yield spreads are slightly wider on the day, but well within the extended levels (>80bpts) observed in Aug/Sept."

"The EUR has failed to extend the bullish break of its recent range and has traded somewhat defensively over the past several sessions. The 50 day MA (1.1604) appears to be providing some support, and momentum remains marginally bullish with an RSI that is softening modestly while remaining in the mid-50s. We remain bullish absent a break back below the 50 day MA and look to a near-term range bound between 1.16 and 1.17."