Euro Slips Against Dollar on Energy and Spread Pressure

Key Moments

Pressure on EUR/USD from Energy Dynamics

ING strategist Chris Turner reports that EUR/USD has moved under the 1.1500 level as the currency pair comes under pressure from higher energy prices that are priced in Dollars. While some European firms benefit from Dollar receivables, he notes that, for most European corporates, the increase in Dollar-denominated energy payables is proving difficult.

Turner points out that technical support appears sparse once the pair trades below 1.1470, with the next notable area seen around 1.1390/1.1400. He references lows recorded in early August last year in that zone as a key reference point for market participants.

Peripheral Spreads and De-leveraging Concerns

Turner also draws attention to developments in eurozone sovereign bond markets, focusing on the behavior of peripheral spreads relative to core benchmarks. He emphasizes that this trend warrants close monitoring, given the recent move wider in these spreads.

He explains that earlier this year, a backdrop of low volatility and strong demand for carry had compressed peripheral eurozone sovereign spreads to very tight levels, citing an example of 50bp for 10-year Greece-Germany sovereign spreads. The recent broadening of spreads is described as likely linked to de-leveraging, but Turner adds that the market is now increasingly focused on how governments respond to elevated energy prices.

Fiscal Response and Relative Impact on Europe

According to Turner, investors are watching for announcements of government measures designed to shield consumers from rising energy costs and assessing how such policies could alter fiscal trajectories. He suggests that these evolving fiscal dynamics have the potential to become a more significant narrative for Europe than for the United States.

Short-Term EUR/USD Outlook

Discussing near-term trading prospects, Turner cautions that the currency pair may find it challenging to reclaim the 1.1500/1.1525 area in the current environment. He notes that a move back above that range would likely require “some clearly positive news out of the Gulf.”

Key Technical Levels and Market Focus

Original Commentary (Quotes)

“EUR/USD is just breaking below 1.1500 in early Europe. European corporates with dollar receivables are welcoming the news, but for the vast majority of European corporates, the higher dollar payables of energy costs are painful. Below 1.1470, there is little support until the 1.1390/1400 lows seen in early August last year.”

“Another trend that bears watching is the widening in peripheral eurozone sovereign spreads.”

“Low volatility and the search for carry had seen the markets drive peripheral spreads to very narrow levels indeed earlier this year – e.g. 50bp for 10-year Greece-Germany sovereign spreads.”

“The current widening probably reflects just de-leveraging, but investors will now be tracking government support measures to protect consumers from higher energy prices and what that means for the fiscal outlook. Again, that could be a bigger story for Europe than for the US.”

“EUR/USD could struggle to make it back above 1.1500/1525 today unless there is some clearly positive news out of the Gulf.”