• EUR/USD has slid into the mid-1.0400s as the buck benefits from safe-haven demand and hawkish Fed bets.  
• Some are eyeing a test of annual lows in the mid-1.0300 against an increasingly bearish backdrop.  
• The main event of the week will be Wednesday’s Fed meeting, plus US Retail Sales and PPI data.  

Though ECB policymakers continue to endorse the hawkish rate guidance unveiled by President Christine Lagarde following last week’s policy announcement and has markets betting on a 25 bps rate hike next month followed by a 50 bps move in September, the euro bulls are nowhere to be seen. Indeed, EUR/USD has on Monday slumped back to its lowest levels since 17 May just above 1.0450, down a further 0.6% on the day following drops of closer to 1.0% each last Thursday and Friday.  

EUR/USD downside over the past few days is a story of US dollar strength, with the buck benefitting from a combination of markets amping up Fed tightening bets and pushing US bond yields higher, while risk assets crumble, spurring demand for the world’s reserve currency as a safe-haven. Regarding the former, US 10-year yields rocketed to fresh multi-year highs on Monday above 3.25%, spurred as market participants bet that the Fed might even opt to go with a 75 or 100 bps rate hike in wake of last Friday’s hotter-than-expected US inflation data.  

Traders will recall that data last Friday revealed the headline rate of annual US inflation according to the Consumer Price Index (CPI) to have risen to 8.6%, a new four-decade high. Meanwhile, data released by the University of Michigan later in the day showed Consumer Sentiment at a record low (going back to the 1970s) in June, sparking calls that the US economy might already be in, or at least imminently headed towards, a recession.  

Given that high and rising US inflation precludes the Fed from easing to support growth (for the time being), the buck is able to garner safe-haven demand as a result of US growth fears. Punchy geopolitics-related headlines have also been in focus over the weekend, with China flexing about how it is ready to start a war against Taiwan if it declares independence and Russia seemingly gaining further ground in Ukraine. Meanwhile, Covid-19 infections in Beijing are on the rise again as officials there initiate further rounds of mass testing, highlighting the ongoing China lockdown risk. 

US data this week (May Retail Sales & Producer Price Inflation plus June Philly Fed Manufacturing Index) is likely to reinforce that the economy is looking increasingly stagflationary, whilst the main event state-side will of course be Wednesday’s Fed policy announcement. The only data of note out of the Eurozone will be German ZEW figures for May on Tuesday. Against the current macro backdrop of risk-off flows and an increasingly hawkish Fed, a test of earlier annual lows in the mid-1.0300s seems very much on the table.