📝 Euro More Concerned About Stagflation Than Macron: ING Strategy

Perhaps because it is also a US public holiday today, EUR/USD has barely budged on the news that President Macron’s party has failed to secure a majority in parliament. This may also be because it is too early to conclude how Macron’s government will govern and which alliances can be secured on a policy-by-policy basis. Macron’s loss of an overall majority and the likely struggle ahead to implement his reform agenda looks to be a mild negative for the euro.

Yet the bigger picture of stagflation in Europe has a much larger say in euro pricing. Here, the euro trade-weighted index is barely 1% off the lows of the year – even after this month’s hawkish shift by the ECB. Failure of EUR/USD to gain after the hawkish ECB meeting on 9 June is a reminder that the euro is a pro-cyclical currency, and that tighter policy may damage the euro through the relative growth/equity flow channel.

We expect EUR/USD to continue trading towards the lower end of a 1.02-1.08 range this summer as the Fed pushes ahead with its aggressive tightening cycle. - ING Strategy