The euro is the common currency for the Eurozone, one of the world's largest regions in terms of GDP. The currency is fairly unique as it is shared by several countries with independent political and economic policies. The euro is the second-most traded currency in the world after the US dollar, according to a recent survey by the Bank for International Settlements. Specifically, the euro is involved in 19% of total foreign exchange trading.
The euro is currently strengthening against all major currencies. The common currency is the strongest against the Japanese yen and the US dollar. Yesterday, the euro rebounded against the US dollar after finding buyers at the low end of our daily trading range (1.1510). The euro continues to strengthen today. Today's EUR/USD trading range remains 1.1510 - 1.1680.
Beyond finding buyers at recent lows, the euro is making gains today thanks to improving sentiment figures. While German manufacturing PMIs (a measure of sentiment) fell relative to previous monthly figures, composite PMIs were better than expected. This suggests that the outlook for the services sector is improving. A similar pattern can be seen in French PMI data. PMIs and other sentiment figures are a good forward-looking indicator, and tend to correlate well with future GDP growth figures.
Given the Eurozone's manufacturing and export-oriented economy, manufacturing PMIs tend to have a bigger influence on the currency. Between decelerating global growth and rising trade tensions, the outlook for Eurozone manufacturing is declining. German auto manufacturer stocks suffered significant declines yesterday after Daimler AG (the parent company of Mercedes Benz) issued a profit warning. While better-than-expected Eurozone services sentiment is welcome news for euro bulls, the ongoing deterioration in the more important manufacturing sector is a significant issue. Later today, we'll see manufacturing PMIs for the broader Eurozone. Our outlook on the euro remains bearish.
EUR/USD is up and trading above 1.1650. The euro is up against the yen, with EUR/JPY trading above 128.30. Finally, the euro is up slightly against the pound, with EUR/GBP above 0.8760.
|June 18||ECB President Draghi Speech|
|June 19||ECB President Draghi Speech|
|June 19||ECB Praet Speech|
|June 19||Eurozone Current Account S.A. APR||€28.4b||€32.0b|
|June 20||Germany PPI YoY MAY||2.7%||2%|
|June 20||ECB Lautenschläger Speech|
|June 20||ECB Cœuré Speech|
|June 20||ECB President Draghi Speech|
|June 21||France Business Confidence JUN||110||110|
|June 21||Eurozone Consumer Confidence Flash JUN||-0.5||0.2|
|June 22||Germany Markit Composite PMI Flash JUN||54.2||53.4|
|June 22||Germany Markit Mftg PMI Flash JUN||55.9||56.9|
|June 22||France GDP Growth Rate QoQ Final Q1||0.2%||0.7%|
|June 22||Eurozone Markit Composite PMI Flash JUN||54.1|
|June 22||Eurozone Markit Mftg PMI Flash JUN||55.5|
Policy: Macron's victory in the French presidential elections catalyzed the ongoing euro rally. While the euro faced existential threats only a few years ago, few investors are doubting the unity of the Eurozone today. Looking at monetary policy, strong growth in the region is also increasing expectations for tighter monetary policy. After the European Central Bank recently reduced the scope of its asset buying program, markets are expecting the ECB to end the program entirely later this year. Looking at politics, upcoming Italian elections remain one of the key risks for the euro. If pro-European Union parties prevail in Italian elections, the common currency has room to strengthen further.
Sentiment: Looking at Commitments of Traders reports, most speculators were short the euro following its epic sell-off in 2014. Traders went net long immediately following Macron's victory and have maintained large net long positions since that time. Thanks to accelerating GDP growth in the Eurozone, sentiment has hit bullish extremes at times. While the euro is likely to pull back when sentiment becomes overly bullish, the longer term bull market looks set to continue.
Economic data: After experiencing a recession ending in 2013, the Eurozone has delivered stable growth since early 2014, helped substantially by a falling currency and a rising trade surplus. For now, growth remains strong and continues to support the currency. In early 2018, strong Eurozone manufacturing PMIs (a forward-looking indicator) pointed to continued strength in the underlying economy. On the other hand, Eurozone inflation remains subdued, despite the effect of rising oil prices. A stronger euro is likely to further weigh on inflation going forward. Overall, the impact from growth and inflation points to continued euro strength.
Earlier today, we downgraded our euro outlook to neutral in the medium-term, and bearish in the short-term. As the euro runs out of momentum, the trend is now neutral based on quantitative factors such as price, trading volumes and volatility. While forward-looking economic indicators continue to suggest an ongoing expansion, growth appears to be slowing in rate-of-change terms. This is why our p…
In our previous take on the euro in late February, we wrote that the bullish case for the currency was looking increasingly challenging. At the time, euro speculators were spooked by slowing forward-looking economic indicators, while upcoming political events in Italy and Germany risked the future unity of the region. While our outlook remains mildly bullish, this comes with the significant cavea…
Improving growth and falling political risk are pushing the Euro higher, but constant changes in the landscape put this movement at risk. Significant declining trends will impact the euro forecast - and speculators and traders should take note of the increased risk.