Although the EUR has still managed to outperform most of its other G10 peers in the month to date, the perception that the ECB may have become more concerned about the Eurozone growth backdrop may be punching holes in the single currency’s armour, Rabobank’s FX analyst Jane Foley notes.

EUR/USD to edge lower medium-term

“In the run up to this week’s ECB policy meeting, the spread between 2-year Bund and treasury yields has touched its widest level since last July in a reversal of the trend that has been in place since the spring. This has clearly weighed on EUR/USD.” 

“Looking ahead, the guidance offered by ECB President Lagarde on Thursday (if any) will be watched carefully. While there is scope for EUR doves to be disappointed near-term in view of still sticky services sector inflation, we still expect that EUR/USD will edge lower medium-term.”

“The remarkable absence of recognition about the need for budget consolidation by either US Presidential candidate suggests that fiscal policy could be more inflationary in the US. This suggests scope for a stronger for longer USD.”