EUR flows: EUR marginally firmer after hawkish Schnabel, but..

The EUR is generally slightly firmer this morning following early comments from ECB board member Isabel Schnabel indicating that she saw a June rate hike as necessary. EUR 2 year yields are up 4bps on the day while front end yields elsewhere are lower due to some optimism over a US/Iran deal, but this overstates the impact of the Schnabel comments as EUR yields dropped sharply on Monday when the US and UK were on holiday. A June hike from the ECB was in any case already widely expected, but is now priced as near a 90% chance. We doubt there is much upside for the EUR as a hike may well be seen by the markets as a policy error. Schnabel also notes that while inflation is too high growth is weakening with consumer confidence dipping. Yield spreads don’t support any EUR recovery, and there is an increasing risk of a risk negative response to monetary tightening. We consequently still see medium term downside risks for the EUR against the USD and JPY.