Russia FX Beat - June 29, 2017

> Today's focus. German CPI data to undermine euro rally?
> Global trigger: Euro on fire. This week's EUR/USD surge has forced the DXY Index below 96. Currently at just beneath 95.9, this much-watched gauge is testing the major low seen in the immediate aftermath of the US election. EUR/USD's influence over the DXY comes from the fact that the euro has a 58% weighting in the index, dwarfing the 14% weighting of the yen, the next biggest weight.
The positive sentiment currently surrounding the euro is clear to see. Following its surge on Wednesday after comments from ECB President Draghi, markets brushed aside a suggestion yesterday from the central bank that investors had misinterpreted Draghi's remarks. EUR/USD has in fact moved on this morning to a new high of above 1.14.
Important to the current euro bullishness will be whether indexes of EZ sentiment push on to a new cyclical high (11:00 Moscow time). Later on today, German CPI for June is forecast to edge lower to 1.3% y-o-y from 1.4% (15:00). An upside surprise would bode well for tomorrow's release of Eurozone CPI data, which is expected to slip to just 1.2% y-o-y.
Revised 1Q US GDP today (15:30) should not be a market mover; tomorrow's PCE inflation data is more important.
> Bottom line. EUR/USD at 1.14 looks high enough for now.
> Regional trigger: Inflation pickup. The EU yesterday extended its economic sanctions on Russia by six months to January 2018. The decision was unanimous, and the fact that it was achieved with no fanfare is telling. Meanwhile, reports suggest that a US sanctions bill continues to run into difficulty as it makes its way through Congress.
Yesterday Russian weekly CPI rose 0.1% w-o-w for a fifth straight week. Inflation is slightly higher than usual for this time of year, and an increase in regulated tariff prices at the start of July may see CPI up to 4.2% next month. Stronger inflation, led by food prices, will be an important factor for the CBR decision on July 28. A rate cut is far from assured.
The ruble looks well supported today with the Brent price having climbed to $47.5/bbl. We note, however, yesterday's payment of some R130 bln in dividends from Sberbank. We estimate that as much as $1 bln might be converted back into FX by shareholders in the next few days.
> Bottom line. USD/RUB could test 59 based on rising oil prices.