The EUR Week - Eyeing the EUR:USD swap differential

THE EUR WEEK - BIAS IS NEUTRAL

Expected EUR/USD trading range is 1.0360 - 1.0610.

thanks to ABN AMRO who wrote in their Week Ahead that despite weakness in Germany, France (Olympics payback), and more broadly in industry, Eurozone aggregate activity data has come in on the firmer side in October and November, particularly consumption but also construction. As such, while the Dutch bank agree with consensus that growth will slow from Q3, they think the slowdown may be more shallow, to 0.2% q/q from 0.4% in Q3.

For the ECB, the Governing Council is widely expected to lower the deposit rate by -25BPs, to 2.75%. The ECB seems to have shifted its view more recently on tariffs towards the dovish side, and it will be interesting to see if this is expanded on in Lagarde’s press conference remarks.

At this juncture for markets and our base case is for -25BPs of easing in January and March, with -100BPs in total for 2025. Pre ECB and FOMC, the two-year EUR:USD swap differential has narrowed towards 165BPs and a tightest since early November. Where will price be after this week?

Also, ABN talk Germany, with Q4 GDP Thursday, expected to show a small contraction of -0.1% in Q4 2024. A preliminary estimate for annual growth for 2024 was already released last week amounting to -0.2% for the year, from which the small contraction in Q4 follows.

Looking forward to 2025, the outlook for the German economy remains bleak with structural challenges, especially for industry continue to weigh on the outlook. ABN do expect a small cyclical improvement as rising purchasing power and rate cuts feeding through to the economy should increase demand slightly.

Just released, there were two beats for the IFO in January (85.1 business climate, 86.1 current assessment) and one miss (expectations 84.8).

RISK 1 - TRUMP of course. Last week, Trump states he may consider universal tariffs, but is not ready yet as the US president reiterated his call for the EU to buy more American oil and gas if the bloc wants to avoid tariffs. Latterly, it was Colombia to stoke the US president's ire. Next, it could be a Eurozone country. Watch this space.

RISK 2 - Plenty of OPTIONALITY again this week, with notable strikes (between 1.01 - 1.07) at 1.0200 and 1.0300 and 1.0500.

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