ING: The EUR - FJElite

A hawkish hold from the ECB provided little support to the euro yesterday. The reasons for that appear to be high energy prices weighing on European growth prospects and, more importantly, a larger adjustment in real rates in the US than in the eurozone. Here, two-year real EUR/USD swap differentials have widened out to levels last seen in late 2024 when EUR/USD was trading under 1.10. We do not think EUR/USD needs to trade down to those levels now, but as long as energy prices continue to fire up Fed tightening expectations, we think the pair should be pressing the low 1.13s.

For today, the eurozone data focus will be the July flash PMIs and also the WAVE inflation survey. These should confirm the ECB's risk assessment of downside risks to growth and upside risks to inflation.