EUR/USD declined below the 1.09 mark. Economists at Société Générale analyze the pair’s outlook.
The pace of EUR/USD appreciation should be gradual
The 10Y Bund fell to 2.395%, extending the correction from the October high to 60 bps. A decline of 12 bps to 2.09% at break-even comes down 8 bps from the real 10Y yield to 33 bps. This pulled EUR/USD back below 1.0950 from a high of 1.1017. A return below 1.0915 could initiate a deeper pullback.
The drop in Eurozone inflation to 2.4% in November inevitably bolstered expectations that a first rate cut may happen sooner in 2024 than our house view for the end of next year. The drop in inflation means the real policy rate measured off the depo rate rose to 130 bps. This compares with 210 bps for the US (Fed effective rate of 5.33% minus CPI of 3.2%). Until the spread narrows, the pace of EUR/USD appreciation should be gradual.
