ING: The EUR - FJElite

Having priced over 80bp of tightening from the European Central Bank this year, markets are now pricing just 55bp. A lot of that adjustment looks like short-term interest rates slavishly following oil prices. Yet last week's batch of softer European PMI data clearly warns of a contraction in European activity in the second quarter. The ECB is undoubtedly breathing a sigh of relief over market pricing of rate hikes, and we think it will hike only once this year, in June.

We have been saying for some time that we think EUR/USD fair value at the moment is around the 1.16/17 area and that there is not a strong case for a breakdown to 1.1500. Yet that may be the direction of travel should more members of the FOMC speculate about a rate hike, and as the European data continues to disappoint.

In terms of data this week, we'll get our first look at some of the eurozone May inflation data at a country level and a final look at the first-quarter GDP readings. On the face of it, there is nothing clearly on the calendar to drive big market moves, and the offered tone in EUR/USD implied volatility looks set to continue. Expect ongoing interest to play the downside in cross rates like EUR/AUD, where the Australian dollar's high carry and perhaps another hot Australian inflation release tomorrow (April data) could firm up expectations of even more Reserve Bank of Australia rate hikes this year.