EUR Don’t Look Comfortable on the High Prices

EUR: Rally looks a bit stretched 

EUR/USD is currently trading at its highest levels since early 2022, and according to CFTC data, pre-CPI positioning on EUR/USD was already significantly long (+19% of open interest). Additionally, my financial fair value model, which considers rates and equity factors, suggests there's a 2% short-term risk premium embedded in EUR/USD. This overvaluation gap in the short term could be closed through a correction or by the emergence of EUR/USD-positive factors without causing a surge in the pair.

The upcoming week is relatively light in terms of data releases in the eurozone. However, I will be paying close attention to a conference organized by the Bank, where European Central Bank President Christine Lagarde and other ECB speakers will be sharing their insights. This event could potentially influence market expectations leading up to next week's policy meeting, even though it seems likely that a July hike has already been decided, and discussions have commenced regarding September.

My assessment indicates moderate risks of a correction in EUR/USD during this week, with the possibility of the pair retracing to the 1.1100/1.1150 range. On the other hand, if the rally from the previous week continues, it may encounter growing resistance in the 1.1300/1.1350 area.

GBP: CPI is a big risk event 

In my previous discussion, I’ve analysed how the latest UK wage growth figures have set the stage for another 50bp hike by the Bank of England in August. The faster-than-expected inflation deceleration in the US had a negative impact on the pound in certain non-dollar pairs, primarily due to the vulnerability of the ultra-hawkish BoE market rate expectations.

This vulnerability of the pound continues to persist as markets factor in a total tightening of 130bp, reaching a peak in the UK, which leaves significant room for potential dovish repricing. The upcoming UK CPI release this week becomes a critical risk event for the sterling since any indications of price pressure deceleration would likely shift expectations toward a 25bp hike rather than a half-point hike in August. Currently, markets price in 45bp for August, indicating that the downside risks for the pound probably outweigh the upside.

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