FX Update: Euro and periphery extends bounce, aided by risk sentiment. FX Update: Euro and periphery extends bounce, aided by risk sentiment. FX Update: Euro and periphery extends bounce, aided by risk sentiment.

FX Update: Euro and periphery extends bounce, aided by risk sentiment.

Forex 5 minutes to read
John Hardy

Head of FX Strategy

Summary:  The euro has lifted further today, nearly touching 1.1000 in EURUSD terms in anticipation of a significant new fiscal boost and as risk sentiment has improved today in Europe despite a lack of positive developments in Ukraine. Elsewhere, short US yields have pulled to new cycle highs in the US ahead of the FOMC meeting next Wednesday, while longer yields are higher nearly everywhere, applying pressure on the Japanese yen and Swiss franc.

FX Trading focus: Euro continues boost on higher yields, rising risk sentiment

Anticipation of a new EU fiscal boost to address urgent new energy and defense priorities in the wake of Russia’s invasion of Ukraine has helped the euro to stabilize and even recovery sharply versus the traditional safe havens, especially the JPY and even CHF. This was at least in part as EU yields responded to the news of an impending new fiscal push. The timing could certainly also have to do with the ECB meeting up tomorrow, which is a very difficult one for Lagarde and company. Too easy a message due to the exigencies created by the war in Ukraine and the EU risks even worse inflation, while too strong a message looks out of touch with the economic strain from the situation. I like the idea of abandoning the odd orthodoxy around “sequencing” – the idea that quantitative easing needs to be wound down before rate hikes begin. But let’s see what the ECB is set to say: it certainly needs to go long credibility in some shape or form on the inflation front – at minimum that is resolutely set to maintain a “nimble” or “flexible” stance that indicates it will be ready to very quickly begin policy tightening lift-off if the clouds of war lift. A look at the charts shows how very far the euro still has to go if it wants to neutralize the latest down-draft: EURUSD traded 1.1300 on the day Russia invaded Ukraine and was probably already slightly discounted due to the risk of a war breaking out – to get back to these levels, the war may need to end, or at least the asymmetric pressure on the EU’s economy will need to end. Still, I am open to the idea that the EURUSD in particular may have bottomed for the cycle and EURCHF as well.

Long US treasury yields have rose sharply yesterday and risk sentiment has improved today, both of which have helped USDJPY pull back toward the cycle highs above 116.00 today. The European sovereign market may actually be one of the drivers for JPY weakness as European yields all along the curve responded strongly to the news that the EU is set to announce a significant new joint issuance of bonds to fund energy and defense spending initiatives. Short US yields are at new cycle highs as well as the market is pricing quarter-point moves from the Fed as far as the eye can see, with more than six hikes “priced” for the forward curve through the December FOMC meeting again, only about 7 basis points south of the cycle highs from early last month. When risk sentiment stabilizes as it has suddenly done today, the combination of that together with yields pulling back higher injects extra energy into JPY weakness. This after the JPY backed up sharply as a safe haven in the wake of Russia’s invasion of Ukraine. The Bank of Japan has never changed its tune on policy and was out defending the 0.25% cap on 10-year JGB’s in February just before yields dipped a bit and then dipped more on the Ukraine-linked deleveraging and spike in commodity prices (high energy prices an additional source of JPY stress as Japan imports virtually all of its energy). If long yields continue to pick up and head back to cycle highs in Europe and the US, the JPY could come under significant pressure again – we’re not there yet, but USDJPY isn’t far from the cycle highs above 116.00, nonetheless.

Source: Saxo Group

RBA Governor Lowe was out overnight speaking on the state of the Australian economy and the outlook for monetary policy, even with helpful charts. The focus is on everything from Australia’s so far relatively muted inflation outcomes (hmmm – don’t we need a look at Q1 CPI…?) which are in part due to less volatility in domestic energy prices and a less heavy-handed fiscal approach during the pandemic than, ahem, the USA. The speech recognized the rise in Australia’s terms of trade from the enormous mark-up in the value of its commodities exports, but says that much of the swell in corporate profits for extractive industries and related tax revenues for the government will be offset by margin pressures for other companies and a pinch on household budgets, so that the aggregate national income increase will be saved more than spent. On monetary policy, the RBA is still quite balanced, modestly concerned with both moving too late and too early. Wages are a primary focus and have not accelerated or suggesting any risk of a wage-price spiral, even if Lowe expressed a bit of insecurity that the bank doesn’t have modern experience of how wages will behave at anticipated new lows in the unemployment rate. The other area of insecurity was whether the new supply side shock could destabilize inflation expectations, something it will be watching for carefully. In terms of actual rate hike guidance, we only get the indication that the bank anticipates hike rates “later this year”. Interestingly, the market is pricing the risk of far higher rates by year-end, with lift-off as early as the June meeting and five hikes through the December RBA meeting.

Yesterday, the National Bank of Poland hiked 75 basis points to take the rate to 3.50%, this versus the 50 basis point hike expected. It backed up the move with the threat of intervention if PLN volatility persisted. The timing was perfect for maximum impact, given the recovery in the euro yesterday (a better outlook for the euro and stronger risk sentiment in euro usually feeds through to even more strength in CEE currencies and SEK, for example) after EURPLN touched the 5.00 level for the first time since the 1990’s-era redenomination. Governor Glapinski will hold a press conference just after this piece goes live.

Table: FX Board of G10 and CNH trend evolution and strength.
A change of pace is rapidly unfolding now across FX as gold has lost tremendous altitude today after a huge run-up, while the euro has surged and peripheral euro FX even more so (see the SEK +2.8 change of 2-day momentum), while safe haven currencies have reversed – this is a significant mean reversion even without any improvement on the ground in Ukraine. Tomorrow’s ECB meeting is likely to tell us how much of this was merely position squaring ahead of the ECB meeting.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
Note the scale of the reversal in EURGBP relative to other Euro pairs – far more significant and a negative sign for sterling. Elsewhere, too early to draw conclusions in may places, but watching the top of the range in USDJPY and whether the AUDUSD bearish reversal was a red herring as the bounce back unfolds….

Source: Bloomberg and Saxo Group

Today’s Economic Calendar Highlights (all times GMT)

  • 1400 – Poland National Bank of Poland Governor Glapinski to speak
  • 1500 – US Jan. JOLTS Job Openings
  • 1800 – US 10-year Treasury Auction
  • 0001 – UK Feb. RICS House Price Balance

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000

Contact Saxo

Select region


The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.