BNP Paribas has become more ‘confident’ that although the catalyst for a strong move lower in EUR/USD may take some time to materialize, its upside is capped below 1.40 due to a combination of FX-focused ECB comments and reduced pace of EM reserve accumulation.
“The latter implies that central bank diversification demand for EURUSD is likely to be much less of a factor in Q2 than it was in Q1,” BNPP argues. On the USD front, BNPP’s base case scenario for a USD-supportive spring bounce in US data remains on track with April Richmond Fed surprising to the upside similar to the Philly Fed last week and the decline in March existing home sales being smaller than expected. “Higher front-end yields remain paramount to a stronger USD and the ability of the 2y to hold above 40bp will be key for the dollar in the second half of the week,” BNPP adds. Datawise, BNPP thinks that given the ECB’s focus on inflation, next week’s Eurozone CPI print will likely be a market mover for EUR/USD.