Real rate differentials continue to suggest EURUSD has more downside. We have two ways
of looking at real rate differentials. The top left chart shows the 2 year rate differentials
deflated using CPI. The top right chart takes the same data but also divides the real rate
differential by the implied volatility of an at-the-money EURUSD option. We do this to adjust
for the risk inherent of having exposure to spot EURUSD moves. Both are still falling at
present driven by rising inflation in the eurozone, pointing to more downside for EURUSD.
The bottom right chart shows that of the major currencies we track, real-rate differentials (vs
the USD) are only lower in the Czech Repulic and UK. Every other currency is higher than the

We continue to see eurozone inflation staying supported. The bottom left chart shows
our leading indicator for eurozone CPI, which points to steady inflation ahead. The longer-term
trend of the falling unemployment rate and tightening labour markets will also help to
support core inflation. This should help to keep real rates low and EURUSD under pressure.

(Click on image to enlarge.)

Source: Bloomberg, Macrobond and Variant Perception