BOBL TECHS: (U5) Trading Above Its Recent Low

The EUR real effective exchange rate is at its strongest in a decade, currently 3.8% above its 5-year average and 4.5% above its 10-year average. Meanwhile, the nominal exchange rate has moved to a fresh all time high, with EURUSD at its highest since 2021 and EURCNH its highest since 2014. 

• Policymakers care about a stronger exchange rate because it weighs on import prices and makes domestic exports relatively less competitive. In the current environment, both channels work in a dovish direction for the ECB – potentially increasing the risk of inflation undershooting the 2% target and dragging on already weak economic activity. This may justify further monetary easing beyond what is already priced into markets (terminal of ~1.75%).
• There’s been increased focus on exchange rate commentary after ECB VP de Guindos suggested yesterday that a EURUSD rate above 1.20 would be “complicated” (see here and here for some thoughts on how this could impact near-term EUR sentiment).
• ECB’s Kazaks also suggested yesterday that a significantly stronger Euro could tilt the balance towards another cut. Other policymakers have appeared less concerned though, namely Muller and Centeno.
• There is some tension between ECB officials being concerned about the strength of the Euro while simultaneously calling for the region to take advantage of recent dollar weakness and boost the footprint of the single currency in reserve asset portfolios.  Worth recalling comments from Lagarde on May 26: “Increasing the international role of the euro can have positive implications for the euro area. It would allow EU governments and businesses to borrow at a lower cost, helping boost our internal demand at a time when external demand is becoming less certain."
• Ultimately (as noted by de Guindos) it is the speed of ascent rather than the level of the EUR that will be most important to monitor. 

• After printing fresh 2025 highs last Friday, GBPJPY has now extended its subsequent pullback to around 1.7%, exacerbated by the latest concerns surrounding the future of UK Chancellor Reeves and the session’s persisting weakness for gilts.
• Today’s weakness has seen GBPJPY substantially narrow the gap to a key technical support area, an uptrendline drawn from the May 22 low and the 50-day EMA, which intersect between 194.80-195.00. A break of these levels would be a bearish development and threaten the steady uptrend in place between April-June.
• Below here, Fibonacci retracements of the 2025 range would provide targets. The 38.2% and 50% retracements are located at 193.30 and 191.60 respectively.
• Aside from political developments, the UK data highlight of the week will be the Decision Maker Panel data on Thursday at 0930BST, where firms’ expectations of own price rises and wage increases over the next 12 months (and in recent times) will be the most watched components.

Source: Bloomberg Finance L.P. / MNI

Mixed trade since the open - two-way with call volume outpacing puts. Underlying bear steepening sees projected rate cut pricing firming slightly vs. morning (*) levels: Jul'25 at -5.8bp (-4.8bp), Sep'25 at -29.6bp (-28.1bp), Oct'25 at -46.3bp (-44.3bp), Dec'25 at -65.5bp (-63.5bp).

• -5,000 SFRN5 95.75/95.93/96.00/96.18 call condors, 13.25 - more offered
• -5,000 SFRN5 96.00 calls, 4.5-4.25 ref 95.99
• +5,000 SFRU6 98.00/99.00 2x3 call spds, 8.0 ref 96.86
• +5,000 SFRU5 96.00/96.25/96.50 1x3x2 call flys, 2 ref 96.00
• 3,700 SFRZ5 96.37/96.43/96.50/96.56 call condors ref 96.325
• 2,500 3QQ5 96.37/96.50 2x1 put spds ref 96.55
• -2,000 SFRN5 95.75/95.87/96.00 put flys, 3.5