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Oct 26 - 11:55 AM

EUR/USD - COMMENT-Fed, ECB Inflation Responses Seen Weighing On EUR/USD

By Christopher Romano  —  Oct 26 - 10:25 AM

EUR/USD slid in early U.S. trade on Monday, falling back below the 10-day moving average and turning negative on the session -- after rallying to 1.1626 overnight on EBS -- and expectations that the Fed would be more aggressive in tightening looked set to weigh on the euro.

Inflation expectations, reflected in euro zone EUIL5YF5Y=RR and U.S. USIL5YF5Y=RR 5-year/5-year inflation linked swaps, have reached 7-year highs and show no signs of pulling back.

Inflation concerns were bolstered by the wage and benefit cost component of the September Philly Fed services report nAQN04SB9Q and persistent U.S. house price increases nN9N2NL02N.

Investors appear to be pulling forward rate hike expectations but they expect the Fed to be much more aggressive in hiking rates.

Eurodollar prices remain near recent lows and show no signs of rising.
June 2022 eurodollars EDM2 are consolidating their recent drop which implies lower levels and higher rates are likely.
Euribor prices FEIZ2 have fallen and look set to slide further to indicate an ECB hike could be due.

Disparities in eurodollar and euribor pricing out to Q3 2026 indicate rates in the U.S. will be much higher than in the euro zone.
The differential is likely to keep EUR/USD downside risks in place.

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Source:
Refinitiv IFR Research/Market Commentary

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