EUR/USD has been hovering around 1.10 for almost a month. In the current risk-on environment, economists at Société Générale think that investors should be mindful of a set of risks to our central scenarios that could revive volatility and trigger a transitory USD rebound.

Seasonals

“May has been by far the worst month for EUR/USD over the past 20 years, with 63% of the years seeing a lower Euro. The average spot return was -2.9% in the 12 bearish years.” 

Hawkish Fed repricing

“The current Fed narrative can be described as a ‘hawkish pause’, and the market is pricing in more than 50 bps of rate cuts this year. If the US CPI doesn’t fall fast enough, the Fed might be forced to rethink and possibly trigger a harder landing. A return to a hawkish path where the market no longer expect cuts would be painful and boost the Dollar.” 

ECB tightening pace

“The latest Bank Lending Survey shows a sharp contraction in credit, suggesting that higher rates may already be undermining euro area activity amid upside core inflation risks. The euro area manufacturing PMI is now at its lowest level since June 2020.” 

Weaker China

“The unexpected drop in China imports in April (especially in commodities) raises concerns about the country’s recovery from its zero-COVID policy and its potential to stimulate the global economy.”

US banking sector 

“Tighter credit conditions are putting US regional banks under pressure, especially those with elevated CRE (commercial real estate) concentration risk. This risk is more likely to involve FX volatility upside via global volatility than the Dollar itself.”