EUR/USD starting to gain positive traction – Societe Generale

Societe Generale analysts note that markets are pricing in a 3.5% European Central Bank (ECB) terminal rate following hawkish comments.

EUR/USD is starting to gain positive traction

"A bulging macro release calendar and the prospect of a truckload of new primary bond issuance could herald a furious start to the new year and catch investors flat-footed without much time to digest the switchover from 2022 to 2023 after the impressive round-up of the year last week."

"The race in 10y Bund yields to above 2.50% (IRS 3.20%) and the daily close in EUR/USD above 1.07 stood out on Friday and capped an extraordinary month of December when both the ECB and BoJ shook up the playbook for 2023."

"The hawkish remarks from a number of ECB officials over the festive period but notably from President Lagarde and Schnabel resulted in a significant re-pricing of the terminal rate to 3.50%, an increase of 65bp in one month. Slow to react at first, EUR/USD is starting to gain positive traction as the rhetoric translates into tighter nominal and real Treasury/Bund spreads."

"Croatia may not have anticipated the volatility in bond yields but it still introduced coins and notes yesterday, expanding the club to 20, at funding terms that are still considerably more attractive than those of the other 19 members since 1999."