Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Chief Investment Strategist
Key points:
The euro is experiencing significant downward pressure, with EURUSD sliding below the 1.0780 support level and hitting over 1-month lows due to a double blow:
The bearish sentiment is further fueled by last week's ECB rate cut, which, despite a neutral bias and non-committal approach to further easing. The central bank’s rate cut has lowered the yield advantage on the euro. The ECB’s dovish stance compared to the Fed, and potential for further cuts, exacerbates this.
Additional factors contributing to short-term bearishness include:
EURUSD is currently trading around 1.0760 and could test 1.0720 as US markets come online. However, there could be room for recovery later in the week as liquidity improves and markets position for the US CPI and Fed meeting.
The resilient US economy might prompt the Fed to shift to a relatively hawkish stance, potentially guiding for two rate cuts this year instead of three in their Dot Plot. This would still be a dovish message compared to market expectations, which signal ~36bps of rate cuts for this year.
To summarize, the scenarios for EURUSD this week include:
In the medium term, risks for the euro have increased, opening the door to a potential move towards 1.05.
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