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 mixed today. The common currency is selling off against the US dollar and the British pound, while making gains versus the the Australian dollar and the Japanese yen. Yesterday, the euro strengthened against the US dollar following significant weakness. Today, the currency has resumed weakening as the spread between US and Eurozone bond yields trades near all-time highs.
Turning to recent news and events, German IFO expectations were significantly below estimates and slowed from previous monthly figures. As Eurozone sentiment data weakens, the outlook for growth this year is worsening as a result. In a previous commentary on the euro, we wrote that decelerating economic growth will ultimately force the ECB into more accommodative monetary policy. Yesterday, we published a preview of the upcoming ECB meeting (scheduled for tomorrow). We argue that the Bank is unlikely to communicate any change in forward guidance (or hint at ending its asset buying program later this year). Instead, we argue that Draghi will buy more time to see if growth continues to decelerate this year. Our short-term outlook on the euro is bearish, while our medium-term outlook is neutral.
EUR/USD is down slightly and trading above 1.2210. The euro is up slightly against the yen, with EUR/JPY trading above 133.20. Finally, the euro is down against the pound, with EUR/GBP above 0.8740.
Looking at this week’s economic events from the Eurozone, the most important event includes an upcoming ECB interest rate decision. Eurozone manufacturing PMIs for April (56 vs 56.1) were below expectations. Services (55 vs. 54.6 expected) and composite (55.2 vs. 54.9 expected) PMIs were ahead of expectations. German IFO expectations for April (98.7 vs. 99.5 expected) were significantly below estimates. Tomorrow, the most important day, we’ll see the ECB’s latest interest rate decision and hear from ECB President Draghi. We’ll also see May GfK consumer confidence from Germany. On Friday, we’ll get German unemployment figures. We’ll also see a range of sentiment data from the Eurozone for April (services sentiment, economic sentiment, business climate, industrial confidence and consumer confidence). Last week, the ZEW sentiment survey for April was below estimates.
As the euro runs out of steam, we are now bearish on the currency in the short-term. Looking at various technical indicators, the currency is trading within normal conditions. This is based on a daily chart of the euro currency index.
As the euro trades sideways, we are now neutral on the currency in the medium-term. Note that the euro is currently trading within normal conditions. Our analysis is based on various technical indicators when looking at a weekly chart.
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.