European bond yields rose and the EUR strengthened after the ECB’s chief economist suggested that the ECB would begin formal discussions on ending asset purchases at its meeting next week.
Italian politics will continue to be important although we may need to await the budget for further information.
In the meantime, marginal upward pressure will likely remain on EURUSD which has started to break away from its tight correlation with BTP spreads. Next resistance 1.1850 ahead of 1.1900 with key resistance back towards 1.2000/1.2012 (200dma). Expect dips towards 1.1760 to find support short term ahead of 1.1715/20.
Focus today is on the Central Bank of Turkey’s meeting, where we would not rule out a 100bp hike to all policy rates.
In recent communication the CBT said it could implement further monetary policy tightening depending on inflation developments; headline inflation accelerated to 12.2% in May from 10.9% in April, driven by higher food and energy prices and FX pass-through.
The Reserve Bank of India decided unanimously to hike rates for the first time since 2014, increasing the repo rate 25bp, to 6.25%. Despite the move being fully priced in by fixed income markets, 10y Indian government bond yields have risen. The RBI maintained its “neutral” stance and in the coming months we expect monetary policy action to remain data-dependent but think the committee would likely prefer to stay on hold for the next one or two meetings.
Markets await the start of the G7 summit tomorrow, where tariffs are likely to be a key topic. The more combative US trade policy this year has raised the risks of a “bad” scenario of escalating trade retaliation.