EUR/USD is enjoying a brief correction as some of the ECB hawks speculate over whether global fragmentation (i.e. shortening of supply chains and trade wars) will be inflationary and will call for higher interest rates, ING’s FX analyst Chris Turner notes.

EUR/USD to correct much higher

“These were the thoughts of ECB's Joachim Nagel yesterday – comments which helped narrow the two-year EUR:USD swap differential by around 10bp and saw EUR/USD correct to 1.06.”  

“On the subject of rate differentials, the market currently prices 10bp of Fed cuts in December (we look for 25bp) and 31bp of ECB cuts (we look for 50bp). Of course, if the Fed cuts 25bp and the ECB only cuts by 25bp, there could be a little upside for EUR/USD amid the seasonal dollar patterns we discuss above.”

“For the time being, however, we do not see a compelling case for EUR/USD to correct much higher and even a move to 1.0660/65 would still be in keeping with a bearish near-term trend. Expect another quiet day for EUR/USD with a focus on the US Treasury pick, as discussed above.”