The Euro (EUR) is trading on the back foot, underperforming most G10 peers amid a sentiment-driven pullback and a lack of fresh catalysts. With European Central Bank (ECB) pricing neutral and euro area CPI in focus midweek, EUR/USD is slipping toward technical support, reinforcing expectations of near-term range-bound trading rather than a decisive trend move, Scotiabank's Chief FX Strategists Shaun Osborne and Eric Theoret report.

Geopolitics drag on Euro despite supportive yield spreads

"The EUR is weak, down 0.3% vs. the USD and underperforming all of the G10 currencies with the exception of CHF. The broader tone appears to be dominating in the absence of any high-level data releases, and this week’s highlight will be the preliminary euro area CPI figures scheduled for Wednesday with headline expected at 2.0% y/y. In terms of the ECB, policymakers’ comments have been limited and the short-term rates market remains neutral pricing no policy changes in either direction."

"Yield spreads are climbing and threatening fresh highs, delivering fundamental support to the EUR. The divergence to spot is notable, and suggests some sentiment-driven weakness resulting from this weekend’s geopolitical developments. The options market is mirroring the movement in spot, with risk reversals moving in tandem with EUR and softening the premium for protection against EUR strength."

"The EUR is seeing modest weakness within the broader flat range from late June. The RSI’s dip below 50 is notable, and we note the renewed drift (lower) toward the 50 day MA at 1.1644. We look to a near-term range bound between 1.1620 and 1.1720."