EUR - trades that catch the eye

2022年5月31日

We can focus on the bullish moves in crypto and crude, but we’ve seen further love for the EUR, with German and Spanish CPI hotter than forecast.

We look ahead to the session ahead for EU CPI estimates (7pm AEST), but the market is now LIKELY positioned for an upside surprise of the 7.8% consensus. We’ve seen EU tradeable interest rate market respond to the regional EU CPI futures, and we’re left seeing 33bp of hikes priced for the July ECB meeting, which is punchy, especially in light of the ECB’s chief economist Philip Lane's comments overnight which suggest a 25bp hike is most likely – we can look further and view that the ECB’s deposit rate is expected to be above 50bp by year-end.

The GER40 hasn’t been put off and is positively trending here, perhaps because the market is taking solace from a drop in Covid cases in Beijing and Shanghai, amid China’s gradual reopening plans. If China is in a better spot, then Europe has greater leverage than other regions.

A rise in crude has certainly been well traded, but higher highs in black gold are no friend to the EUR growth story, but as it stands crude is a one-way ride – it’s hard to fade when we see this sort of price action, and this is one the trend followers will be adding length too. Calls of $150 are becoming heard more liberally, which perhaps tells me we’re getting closer to a top but it's not one I will fade.

In EURUSD, we’re testing the 38.2% fibo (March-May sell-off) now, so as always, it’s how markets react to these levels that counts – a break here and we could squeeze into 1.0900, but this is hard to fade at this point.
As equity markets come back to life post-Memorial Day close, the question is whether we see equity markets roll over? A big if, and while I feel we could squeeze a bit higher, it feels like a leg lower could play out soon enough – as always, have an open mind and respect the tape.


Should this view play out, and the VIX pushes back to 30% then the USD should have a better feel, so this is where we can play the crosses and long EURGBP is the crowd favourite. Our client flow is already positioned net long, with 65% of open positions in EURGBP held long – in the investment banking world long EURGBP is a consensus trade, which is a worry, but the fundamentals certainly justify a move into and above 86.0. We can see fiscal policy will likely be a headwind for the UK economy, relative current account dynamics favour holding EUR exposure, and we can also view that the ECB is just getting going on normalising, while the BoE is at a far more mature stage.

One consideration is that EURGBP 1-month and 1-week implied volatility has come down sharply of late and sits around 6% – in essence, the market is now viewing moves in the cross rate as a grind than an explosive move waiting to happen. This has implications for one’s risk and position size.

Either way, as we look towards EU CPI and the raft of ECB speakers this week, dynamics in Europe look spicy and should be front and centre – I favour a higher EURGBP, but this is a tortoise and not the dynamite trade others prefer.