US-EU trade war remains key risk to euro
Trump's comments regarding EU car tariffs are a reminder that trade is still the biggest risk to the euro
USD: More of the same on the trade policy
Hopes for a rather smooth resolution of the US-EU trade dispute were dashed by President Trump’s comments overnight. He described the EU’s Trade Commissioner’s idea to cut EU car tariffs to zero (conditional on the US doing the same) as “not good enough” and again reiterated the weakness of the euro (which gives the EU a competitive advantage). While the latter may put a soft floor under EUR/USD (as was the case during previous Trump comments on the euro), the potential escalation of the US-EU trade war remains a key risk to the euro as the initial reaction would be EUR negative (given the openness of the EU economy vs US as well as the pro-cyclicality of the euro). All this suggests that the current challenging environment for emerging market FX should remain unchanged.
EUR: Fitch rating review of Italy debt in focus
The core and headline eurozone CPI readings (expected at 1.1% and 2.0%, respectively) should have limited impact on the euro. The key focus today turns to the Fitch rating review of Italy's sovereign debt given recent Italian woes and the BTP-bund spread widening (currently not far from the May highs). We don’t look for a downgrade (partly because the new Italian budget has not been presented yet) but a change in outlook (to negative) cannot be ruled out.
CEE FX: HUF to remain the underperformer
Central and eastern European currencies are feeling the spillover from the generally negative sentiment towards emerging market FX. Within the region, we continue to look for the Hungarian forint to underperform given that: (1) the dovish central bank remains extremely behind the curve vs its regional peers; (2) lowest funding costs in the region; and (3) EUR/HUF being not far away from the 330 pain threshold above which the inflation outlook for 2019 becomes an issue. While the Czech koruna is modestly weakening, the central bank rates outlook (two more hikes this year are very likely) means that this weakness should remain in check. In Poland, today’s CPI (unchanged at 2%YoY) should have a limited impact on the zloty.
"THINK Outside" is a collection of specially commissioned content from third-party sources, such as economic think-tanks and academic institutions, that ING deems reliable and from non-research departments within ING. ING Bank N.V. ("ING") uses these sources to expand the range of opinions you can find on the THINK website. Some of these sources are not the property of or managed by ING, and therefore ING cannot always guarantee the correctness, completeness, actuality and quality of such sources, nor the availability at any given time of the data and information provided, and ING cannot accept any liability in this respect, insofar as this is permissible pursuant to the applicable laws and regulations.
This publication does not necessarily reflect the ING house view. This publication has been prepared solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ING does not represent that it is accurate or complete. ING does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice.
The distribution of this publication may be restricted by law or regulation in different jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions.
Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved.
ING Bank N.V. is authorised by the Dutch Central Bank and supervised by the European Central Bank (ECB), the Dutch Central Bank (DNB) and the Dutch Authority for the Financial Markets (AFM). ING Bank N.V. is incorporated in the Netherlands (Trade Register no. 33031431 Amsterdam).