By: Valentin Marinov, Head of G10 FX Research, Manuel Oliveri, FX Strategist
EUR/USD's resilience continues despite lingering concerns about Greece and a still subdued, even if improving, outlook for Eurozone growth and inflation. It therefore appears that the outperformance can be attributed to the worsening USD outlook after weaker data over the winter forced investors to pare back bets on US and Fed decoupling.
With USD off its peak, global commodity prices are stabilising and that is supporting global inflation expectations. The result is underperformance of bond and stock markets, which seems especially severe in the Eurozone. This is helping EUR as it erodes investors' exposure to the region’s markets and triggers the unwinding of shortEUR hedges.
The latest developments notwithstanding, we still believe that the Fed will start hiking interest rates in Q3 in response to the improving inflation and growth outlook, whereas the ECB will remain committed to its QE program. We further suspect that escalating concerns about Greece could put the Draghi put to the test over the summer.
The longer-term risks for EUR/USD remain on the downside. That said, fears that the improving inflation outlook will lead to a deterioration in global liquidity conditions should weigh on risk-correlated, higheryielding currencies and trigger further unwinding of EUR-funded carry trades. EUR could gain more ground vs AUD and NZD as a result.