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 up today (particularly against the US dollar), and has strengthened every day this past week. Looking at EUR/USD, the pair is now trading above the critical 1.25 level this morning. In general, the euro continues to benefit from good economic data and monetary policy tightening expectations. Yesterday, seasonally adjusted Eurozone trade balances were higher than expectations. All else held equal, higher net exports tends to strengthen the euro. Turning to politics, Reuters is reporting that two thirds of SPD supporters back another German grand coalition according to a recent poll. 78% of conservatives also back another coalition. This is good news for Angela Merkel, especially as she has been heavily criticized for making too many concessions to the SPD. Looking at Italian elections, markets remain fairly complacent regarding the risk of a Euroskeptic party coming to power. The leading "5 Star Movement" has hinted that leaving the euro is unrealistic. Looking at election predictions, center-right parties affiliated with Silvio Berlusconi are currently leading the polls, but are unlikely to gain enough votes to form a majority government. We will upgrade our short-term outlook to bullish later today. Our medium-term outlook on the euro remains bullish.
EUR/USD is currently up and trading above 1.2530. The euro is flat against the yen, with EUR/JPY trading above 132.660. Finally, the euro is flat against the pound, with EUR/GBP above 0.8870.
Looking at Eurozone economic data this week, we’ll see German consumer prices as well as Eurozone GDP growth and industrial production. The German harmonized index of consumer prices met expectations (1.4%). German (2.3% vs. 2.2% expected) and Eurozone (2.7%) Q4 GDP growth mostly met expectations. Eurozone industrial production was ahead of expectations (5.2% vs. 4.2% expected). Later today, we’ll see German wholesale price index figures. Last week, Eurozone composite PMIs were ahead of expectations, signaling strong future growth.
As the euro strengthens, we are upgrading the currency to bullish 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 continues to strengthen, we are upgrading the outlook to bullish 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.
Looking at this week’s Commitments of Traders report, bullish extremes continue in the euro, British pound and crude oil. Looking at net speculator positions as a proportion of open interest, long crude oil positions are the most at risk. While euro and British pound net positions are elevated relative to historical averages, open interest has also grown over time. Thus neither currency look exte…
In early 2017, doubts regarding the integrity of the Eurozone led many to take refuge in the Japanese yen. Unlike the euro, the Japanese yen exhibits classic safe haven characteristics and tends to strengthen during downturns. Following the Brexit referendum vote and US presidential elections, few were willing to bet on opinion polls that predicted Macron’s victory. Similar to political events in…
Looking at this week’s COT report, the British pound is now at a bullish extreme, while the Australian dollar is no longer at a bearish extreme. Bullish extremes continue in long euro and long crude oil speculator net positions. The purpose of this report is to track how the consensus is positioned across various currencies and commodities. When net long positions become crowded in either direct…