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 recovering against the US dollar, Japanese yen and Canadian dollar, while selling off against the Australian dollar. Yesterday, the euro sold off sharply against the US dollar. Notably, trading volumes in euro futures accelerated for the third session in a row. The combination of yesterday's weakness and rising volumes suggests that traders are selling the currency with conviction. Today's EUR/USD trading range is 1.1430 - 1.1860.
Following news that the European Commission called Italy's draft budget an "unprecedented" breach of Eurozone fiscal rules, the euro weakened sharply yesterday. According to a Reuters report, the Commission stated that Italian government spending was too high, the structural deficit was likely to rise and that Italian public debt would not fall in line with the EU's rules. ECB President Mario Draghi has also weighed in on Italy's fiscal budget, stating that undermining the rules carry a high price for all members of the monetary union. Looking at reactions in markets, 10-year Italian government bonds (BTPs) sold off sharply yesterday and continue to sell off today. 10-year BTPs are currently yielding 3.7% today. Note that bond prices move lower as bond yields rise. While today's BTP sell-off is having a more limited impact on the euro, the common currency is likely to remain under pressure as Eurozone growth continues to slow in rate-of-change terms.
Looking beyond bond markets, the latest developments from Italy are also tempering rate hike expectations. While investors expected the European Central Bank to raise rates by 10 basis points (0.10%) in September 2019, this is no longer the case today. While ECB speakers remain optimistic for future growth in the region, markets appear to be taking a different view. Our outlook on the euro remains bearish.
EUR/USD is up slightly and trading above 1.1460. The euro is up against the yen, with EUR/JPY trading above 128.80. Finally, the euro is flat against the pound, with EUR/GBP above 0.8790.
|October 15||Bundesbank Beermann Speech|
|October 15||ECB Nouy Speech|
|October 16||Germany Import Prices YoY AUG||4.8%||4.8%|
|October 16||Eurozone Balance of Trade AUG||€11.7B||€17.6B|
|October 16||Eurozone ZEW Economic Sentiment Index OCT||-19.4||-7.2|
|October 16||Germany ZEW Current Conditions OCT||70.1||76|
|October 16||Germany ZEW Economic Sentiment Index OCT||-24.7||-10.6|
|October 17||Eurozone Construction Output YoY AUG||2.5%||2.2%|
|October 17||Eurozone Core Inflation Rate YoY Final SEP||0.9%||0.9%|
|October 17||Eurozone Inflation Rate YoY Final SEP||2.1%||2%|
|October 17||Bundesbank Weidmann Speech|
|October 18||Germany Wholesale Prices YoY SEP||3.5%||3.8%|
|October 19||Eurozone Current Account AUG||€20.5B||€30B|
In our last commentary on the euro in late August, we wrote that the common currency was set to weaken further thanks to (1) slowing growth, (2) slowing inflation and (3) an outsized speculator long position in euro futures and options. Following the publication of our last commentary, EUR/USD has weakened from 1.1730 – 1.180 (the top-end of its trading range that we update daily on our...
In our last take on the euro in April, we wrote that the bullish case for the currency was running out of drivers. Specifically, we wrote that decelerating Eurozone growth (in rate-of-change terms), changes in trading patterns and overly bullish speculator sentiment was likely to weigh on the euro in the future. At the time, EUR/USD was trading around 1.23, near its 2018 high just above 1.2550.
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…