German inflation figures for November are expected to come in at 2.6% year-on-year, the highest level in nine months, as another piece to the puzzle of higher euro rates and a shift in market pricing to the hawkish side. Following the Fed meeting this week, the market’s attention will shift to the ECB meeting next Thursday. President Christine Lagarde will present a new forecast, which should be the first test of the current pricing of no further rate cuts, in line with our view.
The front of the EUR curve saw a significant upward move this week, by 10bp in the 2y tenor, which directly countered the movement of USD rates, supporting further spread tightening in favour of the EUR. After EUR/USD touched 1.175 yesterday, the stabilisation of the US dollar should bring a slight correction in EUR/USD more towards the middle of the 1.170-175 range.
Elsewhere, UK GDP figures for October surprised slightly lower, with the economy unexpectedly contracting by 0.1% MoM, dragged down by manufacturing, supporting the Bank of England cutting case next week with 22bp priced in currently. The pound is little changed this morning, but the opening suggests some pressure to weaken closer to 0.878 EUR/GBP.
Frantisek Taborsky