Stay neutral EUR/USD heading into the ECB

From the FXWW Chatroom: The ECB takes centre stage today, ahead of Comey’s testimony (15:00 UK) and the UK election (exit polls due just after 10PM).
Despite resilient growth (Q1 revised to 0.6% q/q), we expect the ECB’s path to policy normalisation to remain gradual in light of low inflation. EURUSD is up c.6% from its April lows, reflecting reduced political risk after the French election, diminished US fiscal stimulus hopes, and expectations of a less dovish ECB. We think these elements are now mostly priced in and risks from today’s meeting appear more or less symmetric.
Removing the “or lower” reference should not alter the supressed front-end pricing as long as the sequencing of rate hikes (only after QE ends) is emphasized. We see a risk that the ECB still sounds overly dovish which may lead to a temporary rally in (real) rates and flatter curves.
China May imports beat expectations, signalling resilient domestic demand despite higher onshore rates. Next week’s credit data is the next key signpost.

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