EUR/USD declined below the 1.09 mark. Economists at Société Générale analyze the pair’s outlook.
The pace of EUR/USD appreciation should be gradual
The 10Y Bund dropped to 2.395%, extending the correction to 60 bps from the October high. The decline in break-evens by 12 bps to 2.09% lopped 8 bps off the real 10Y yield to 33 bps. This pegged EUR/USD back below 1.0950 from a high of 1.1017. The return below 1.0915 could herald a deeper pullback.
The drop in Eurozone inflation to 2.4% in November inevitably bolstered expectations that a first rate cut may happen sooner in 2024 than our house view for the end of next year. The drop in inflation means the real policy rate measured off the depo rate rose to 130 bps. This compares with 210 bps for the US (Fed effective rate of 5.33% minus CPI of 3.2%). Until the spread narrows, the pace of EUR/USD appreciation should be gradual.
Read the full article here