[Original Author, by Nigel Ng]
Europe data was extremely weak, with service PMIs finally turning. I suspect the ECB has recognised this, and despite their efforts to continue looking deliberate towards the fight against inflation, if you look between the lines, they are starting to sound more dovish. This, to me, is valid. On the other hand, the US economy has shown few signs of weakness, especially in the housing and labour markets.
With the recent breakout of 10Y yields across 3.8% supported with strong fundamentals, I believe the greenback will continue to rally against G10, especially against EUR. On Friday’s close today, bonds got a strong bid from Core PCE, a lagging indicator, and a weaker PMI (despite the previous PMI already coming in weaker). Bonds were also supported on very strong rebalancing flows, which I suspect are semi-fake, and was mostly speculators frontrunning the actual flows. Afterhours, bonds start to fall quickly, with the 30Y falling almost 40bps.
With that information I strongly believe the move in broad FX gets faded next week. I also expect the US data in general to be strong (claims, NFP, ISMs) and European data to be weak. Short EURUSD is a high conviction idea.