Synopsis:

EUR/USD is approaching its highest level of the year, driven by USD weakness rather than a reassessment of the euro's prospects. While eurozone economic data may continue to disappoint, the potential for sticky wages could impact ECB easing expectations. The pair's movement will likely remain within its established range, but a break above 1.11 could trigger further gains.

Key Points:

• EUR/USD Near Annual High:

  • The pair is nearing its highest level of 2024, driven primarily by dollar weakness rather than positive eurozone developments.

• Eurozone Economic Outlook:

  • Upcoming eurozone PMI releases are expected to show continued economic stagnation, with the composite PMI index likely hovering around 50.
  • Tuesday’s release of Q2 negotiated wages in the eurozone could influence investor expectations regarding ECB rate cuts, especially if wages remain sticky.

• ECB Rate Expectations:

  • Currently, markets are pricing in 68bps of ECB rate cuts for this year, which ING believes is 18bps too much.

• USD Weakness and EUR/USD Range:

  • The broader story is one of USD weakness, with EUR/USD likely to stay within the 1.05-1.11 range that has dominated for the last 18 months.
  • ING’s economists predict weaker US activity data as tight US real interest rates continue to weigh on growth, which could support further EUR/USD gains.

• Potential Break Above 1.11:

  • If EUR/USD breaks above 1.11, the pair could see a more significant follow-through, especially given the current low levels of realized volatility.

Conclusion:

EUR/USD’s recent strength is largely due to USD weakness, with eurozone economic data still signaling sluggish growth. However, sticky wage data could alter expectations for ECB rate cuts. While the pair is expected to stay within its long-term range, a break above 1.11 could lead to further gains, driven by low volatility and potential for weaker US economic data.