The question this week as it has been for a while is whether a market – with what seem stretched positions in both bonds and FX – can really take the euro further higher without some kind of correction? The main focus will be on Thursday’s ECB meeting and there seems to be a consensus among analysts that the focus of the meeting will be on the lack of inflation, rather than making the case for further tapering of the ECB’s bond purchases. The argument goes, say analysts, that there is some reluctance to rock the boat (both in bond and currency markets) at the start of the summer break. With this in mind, today we highlight the latest edition of BAML’s ”The Thundering Word” where Michael Hartnett and his investment strategy team argue that last week’s Humphrey-Hawkins testimony by Janet Yellen was not the inflection point the summer bears were hoping for. The absence of inflation means the Fed is clearly fearful of raising short term interest rates too quickly, and boosting the value of the US dollar. BAML think this monetary policy setting implies three summer trades (see below). Meantime, we also put the focus on rates normalisation and balance sheet reduction and what that, counterintuitively, might mean for inflation. Quant Insight are an interesting new research firm with a novel approach, and we feature their analysis on how DM rate normalisation impacts on EM assets.