In a note to clients, Credit Agricole outlines its expectations for the upcoming European Central Bank (ECB) meeting in June. The bank notes that the market has been repricing the risk of higher policy rates in the Eurozone ahead of the meeting, though the activity has been relatively muted compared to other central banks. As a result, the short-term EUR-USD rate spreads have decreased, adding further pressure on the EUR/USD pair.
Credit Agricole suggests that a 25 basis point rate hike next week, along with indications from the ECB that it expects persisting inflation in the Eurozone and does not believe financial conditions have tightened enough to threaten growth, could spur further front-loading of rate hikes and support the Euro. However, the bank expects the Euro to consolidate mainly against currencies with dovish central banks or banks that have signaled the peak of their tightening cycle, such as the Japanese Yen and the New Zealand Dollar.
The bank highlights that the recent weakening of the Eurozone growth outlook, along with renewed concerns about China's economic future, could make Euro bulls selective about which Euro-crosses to buy.