Rising Real Yield Spreads Supportive Of EUR; We Stay Long EUR/USD - BNPP

Eurozone flash April HICP ticked down to -0.2% y/y from 0.0%, in line with our economists’ expectations and following weaker Spanish and German HICP data earlier this week.

Furthermore, the advance estimate of eurozone Q1 GDP showed the economy expanding by 0.6% q/q from 0.3%, slightly above market consensus. Weak European inflation and reduced expectations for the ECB to ease policy means that eurozone real yields are rising even though nominal yields are flat (see chart).

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This scenario is supportive of the EUR and consistent with our 1.16 target on EURUSD. Although the ECB did signal last week that it is open to further easing, neither the domestic data backdrop nor the broader financial conditions suggest that additional action is imminent. We believe expanding the APP system is more likely than rate cuts.

*BNPP maintains a long EUR/USD from 1.1290 targeting a move to 1.16, with a stop at 1.1140.