EUR/USD flows: ECB Easing and 10yr Bund Yields

We feel that the ECB is headed towards 75bps of cuts in 2024 and a further 100bps in 2025, both as the economic recovery in 2024 will be weak (after the H2 2023 recession) and as inflation continues to come back quickly to 2% (Q2 2024) and surprises the ECB even further.  The ECB has overtightened in terms of interest rates, but also balance sheet reduction with the huge roll off of TLTRO’s.  Policy needs to become less restrictive and shift towards neutral policy.  This is the strategic story for 2yr yields and we forecast 2.30% by end 2024.  For 10yr the traditional process of less yield curve inversion and then a positive shaped yield curve should also be evident.  Meanwhile, the 10-2yr yield curve is already more inverted than prior to previous easing cycles. Additionally, though 10yr Bund yields have risen a lot since 2020-21, real yields using breakeven inflation rates are still low in real terms and this will likely mean that 10yr Bund yields are volatile but end 2024 at 2.4%.