Euro: Strong data and vigilant ECB support EUR – BNY

BNY’s Geoff Yu believes that recent robust Eurozone data and the European Central Bank's (ECB) cautious stance are bolstering the Euro (EUR), leading to a reevaluation of bearish views on EUR/USD. Strong manufacturing PMI readings, persistent input cost inflation and worries over second-round effects and wage pressures indicate the ECB might maintain a hawkish position.

Any reversal in EUR-funded carry trades could prompt investors to buy back EUR. The Euro is expected to remain supported for now due to resilient data and a hawkish ECB, with near-term fluctuations in October's pro-carry flows possibly triggering a buyback of EUR. Second-round effects will determine future policy decisions, with the ECB acknowledging potential risks but not foreseeing them as additional pressures.

If inflation projections are adjusted upwards, core inflation in 2027 could reach 3%, up from the current 2.5% assumption. European funders' poor flow performance over the past month suggests they stand to benefit most from a carry pullback. With the largest potential for currency moves, European funders have the greatest upside if high-yielding assets begin to experience net sales and funders net purchases.

The flow funding cost ranking of EUR (25 out of 32) highlights its position. In case yields stay stable or rise, the currency's flow performance may surge.