EM Market Report

It all keeps adding up, the EUR cracking up?

Thanim Islam
Thanim Islam 17 May 2023

- Signs of EUR bullishness easing?

- USD continues to gain

- CAD gains as markets reprice interest rate expectations


With retails sales, industrial production, and data from the housing market all suggesting continued strength in the US economy, the USD gained throughout the course of yesterday afternoon after initially dropping in the morning. Rate cut expectations for this year were reduced by the money markets, with 2-year treasury yields back above 4%. The spread between US interest rate expectations and that of the UK has narrowed from 142 bps to 94 bps, and between the US and the EU has narrowed from 140 bps to 101 bps. This also explains the continued strength of USD over the course of the month. Fed speak was also mixed last night with one policymaker indicating more hikes to come, whilst others stressed they wanted to see the impact of hikes so far.

Debt ceiling standoff continues with President Biden and congressional leaders continuing to be optimistic about a deal, whilst Kevin McCarthy continued to warn that the two sides are still far apart.

As can be seen below, GBP performance was mixed following data showing perhaps some slackness in the UK job market. But as mentioned yesterday, there was minimal impact in markets slashing rate hike expectations this year.

Over in Germany, May's ZEW survey showed a continued decline in sentiment with the survey at the lowest for 5 months, suggesting that perhaps the recent optimism in the eurozone is showing signs of waning?

Canada’s inflation numbers showed a surprise uptick in April from 4.3% to 4.4%, causing markets to flip from expecting 0.25% worth of rate cuts to now pricing in 0.12% worth of hikes. GBPCAD declined as a result, taking rates through support levels.


Market rates

* Daily move - against G10 rates at 5:00pm, 16.05.23

** Indicative rates - interbank rates at 5:00pm, 16.05.23

Table (22)

Data points

Table (21)


  • EUR – ECB De Cos, Elderson, Centeno, and Guindos

Our thoughts

EUR and USD news in focus today with the headline being the inflation numbers from Europe. The core CPI number as ever will be key, and we will be monitoring implications on interest rate expectations following the release of the numbers. Currently markets are pricing an additional 0.5% worth of rate hikes by September. The question across the desk now is are there cracks showing in the armour of the EUR? Economic sentiment in Germany has been declining across the last few months and the recent slowdown in rate hikes is suggesting perhaps the market has passed peak bullishness on the EUR. Time will tell, but for EUR buyers there may be some value to be had in the coming months. Please speak to the dealing desk on how Limit Orders can be used as a tool to take advantage of any weakness on the EUR.

Strength in the US housing market from today's numbers will likely add to USD strength, continuing the theme from last week.

Chart of the day

Yesterday we mentioned about the thread of the September uptrend on EURUSD being threatened, with rates sitting on the up trending support line. Yesterday’s ZEW survey from Germany showed sentiment is at the lowest in five months, and looking at the chart below, there seems to be a concern in markets over the impact of recent rate hikes on economies such as Italy. The difference in yields between BTP (Italian government bonds) and Bund (German government bonds) has also been widening with the spread now at its widest since November 2022. The last time it was there we were seeing EURUSD sub-parity. Of course, this doesn’t necessarily mean that the EURUSD should be back there again, but perhaps the cracks are beginning to show on the EUR bull run since September.

17052023 cotdSource: Bloomberg Finance L.P.

Have a great day.