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Euro Looks Like it Wants to Rise Further say Citi

Citi exchange rates

© BruceG1001, reproduced under CC licensing

- Euro less at risk of decline amidst peak pessimism on economy

- Positive eco surprises likely to be felt more than disappointment

- Consensus remains benign for Euro in H2

The Euro appears more geared to a recovery than a decline because “a lot of bad news is already baked into EUR spot prices,” says Alex O’Mahoney an analyst at Citibank, the largest FX dealer in the world.

Since currencies tend to be driven by economic surprises, the Euro is unlikely to fall much more unless the already bad news gets significantly worse.

This is something which is now looking less likely than it did before, particularly amidst signs the Chinese economy is turning a corner which could well thaw the Eurozone's frozen export sector as the prospect for a reboot to global trade beckons.

The Recent ZEW sentiment survey out of Germany was meanwhile quite positive, showing an unexpected rise in the forward-looking index, and given sentiment gauges often lead the wider economy this could be a good omen for harder Eurozone data on the horizon.

The possibility of an upside data surprise giving a boost to the single currency rather than downside surprise weakening it is the main reason for Citi’s medium-term bullish stance.

“This allows us to continue to hold the House view that EURUSD (and by extension other EUR crosses) could price higher over 6-12 months, not only on the basis of a lack of negative surprise but should the data start to improve, then the springboard of positive surprise potential,” says O'Mahoney.

Eurozone data has been at best mixed but at worst exceptionally poor of late. Manufacturing PMI was especially dismal, falling to 47.5 in March from 49.3 previously. Any result under 50 reflects contraction in the sector and is a concerning sign.

Whilst this was marginally offset by the better-than-expected services PMI which rose 5 basis points to 53.3 and suggested a shift in the Eurozone’s economic model to a more service-based economy, it was not enough to allay fears generated by the manufacturing miss.

All eyes will therefore be fixated on Thursday's preliminary PMIs which should give a clear steer as to whether the Eurozone economy is in fact turning a corner.

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The GDP growth rate for the region slowed quite dramatically, rising only 0.2% in Q4, when it was averaging 0.7% in 2017. Q1 is unlikely to be any better.

Strategists at Nordea Bank have meanwhile this week told clients the EUR/USD exchange rate will probably rise to 1.1800 by the middle of the year as liquidity surges. This will happen when the U.S. reaches its debt limit and the U.S. Treasury will have to lend a hand effectively flooding the markets with reserves from its ‘General Cash Account’ to pay for government services.

Another factor is that the Federal Reserve is once again reinvesting principal from maturing bonds it holds on its balance sheet. This also means more liquidity and is likely to be a factor weakening the Dollar.

Deutsche Bank is also bullish the pair, saying EUR/USD will rise in 2019 H2 mainly because the Dollar is likely to weaken. This is because monetary policy will be the only tool left for the U.S. in the event is needs to stimulate the economy. This is due to its already high budget and trade deficits. Monetary policy easing tends to put more pressure on the Dollar.

One factor they see supporting the Euro is its large current account surplus which should keep the Euro steady despite negative factors.

Euro to Dollar chart

Above: The longer-term trend for the Euro against the Dollar is lower, but shorter-term the impulse is higher

But for some, it is too soon to turn bullish on the single-currency.

“On a fundamental basis, there is very little reason to be bullish Euros,” says Kathy Lien, managing director of BK Asset Management. “The economy is weakening, German Bundesbank President Jens Weidmann warned last week that growth in the Eurozone’s largest economy could slow materially in 2019, the US is threatening the EU with hefty tariffs and the German-US 10 year yield spread is falling deeper into negative territory.”

However, Lien warns that even those holding a bearish stance on the currency should be wary of short-term rallies:

“There’s no question that the bears remain in control but in a holiday week like this one, fake outs are more likely than breakouts. Tomorrow’s EZ trade and inflation reports could surprise to the upside, lending support to the single currency and keeping the pair firmly within its 1.1250-1.1325 trading range.”

Analysts have been stubbornly optimistic about the outlook for EUR/USD despite the negative onslaught suffered by Eurozone data in 2019.

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