Scotiabank strategists Shaun Osborne and Eric Theoret note the Euro (EUR) is consolidating around the low 1.14s, with mixed G10 performance as markets reassess Oil’s impact on Euro area terms of trade and the European Central Bank’s (ECB) rate path. They highlight a notable repricing of ECB tightening to about 35 bps by December, supporting EUR via yield spreads, while near-term EUR/USD is seen confined between 1.1380 and 1.1480.

Oil risk and ECB repricing

"The EUR is quietly consolidating in the low-1.14s and entering Wednesday’s NA session unchanged vs. the USD. The EUR is also a mid-performer among the G10, in mixed overall trade with dispersion offering a break from the broad USD-driven movement that has characterized overall performance through much of this year."

"The latest resurgence in geopolitical risk presents a clear potential headwind for the EUR as we assess the renewed rally in oil prices and consider its implications for the euro area’s terms of trade."

"The ECB’s reaction function remains a critical offset however, and renewed hawkishness among policymakers has delivered a repricing in tightening expectations for this year. Markets are currently pricing about 35bps of ECB tightening by December, a more than 15bps increase from July 1."

"Yield spreads are responding, and offering the EUR fundamental support with narrow (2Y spread only) fair value estimates climbing to the mid-1.14s."

"Bearish/neutral – the price action in EUR remains mixed, as the daily chart reveals a still-bearish (sub-50) RSI while intraday charts offer a more constructive view from late June. We remain cautious absent a break back above 1.15 and we look to a near-term range bound between 1.1380 and 1.1480."

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