- EUR eyes return to 2019 low amid bearish technical developments.
- Charts flag risk of move down to 1.0880 and below in weeks ahead.
- As Eurozone's largest economies creak and as the U.S outperforms.
- USD to strengthen further on growth performance, virus concerns.
- But EUR's 'funding currency' status could lift EUR/USD on Monday.
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The Euro underperformed most rivals last week and is tipped for more losses against the greenback up ahead, although the Monday session could provide the Euro-to-Dollar rate with some temporary relief.
Europe's single currency closed 1.35% lower against the Dollar for the week on Friday after data from Germany cast a further dark cloud over the economic outlook just as the U.S. was again displaying its exceptionalist credentials.
Price action has since taken the Euro back toward its October low while some analysts have warned that bearish technical developments on the charts could see the single currency testing its overall 2019 low in the coming days.
"EURUSD is heading for a weak close on the week overall and the loss of support at 1.0975/85 (now resistance) rather points to the broader risk of a retest of the late 2019 low around 1.0880. Short-term trends suggest the EUR could find support at 1.0945, the base of this week’s bear channel, however, which may be the springboard for a modest rebound to 1.0965/75," says Juan Manuel Herrera, a strategist at Scotiabank.
The signals coming from the Euro-Dollar charts are decidedly bearish although Europe's unified unit is also a popular 'funding currency' and because of this it could experience some momentary relief during Monday session as markets respond to the latest coronavirus headlines.
Deaths stemming from the new virus surpassed those of the 'SARS' outbreak over the weekend as the disease continued to spread within the world's second largest economy, which has all but come to a standstill these last two weeks as officials lock down entire cities in order to fight the infection.
Above: Euro-to-Dollar rate shown at 4-hour intervals.
The Euro broke to the downside from a four-month trading range last week as dire German economic data dragged the single currency lower while the Dollar strengthened in response to a series of reports that suggest growth in the world's largest economy may have actually picked up in January.
"The very weak euro-zone data this week was for Dec and hence comes ahead of any coronavirus hit that suggests EUR downside pressure will persist with a breach of the 2019 low of 1.0879 likely," warns Derek Halpenny, head of research, global markets EMEA and international securities at MUFG.
Current speculative positioning in money markets threatens to stir up a perfect storm for the Euro and all other relatively low-yielding currencies because investors have bet heavily in recent months that at least one rate cut is likely from the Federal Reserve (Fed) this year, while increasingly wagering that other central banks are finished with their rate cutting cycles.
The rub for such speculators is that incoming economic data is increasingly pointing to the opposite happening on both of those scores. Incoming economic data is certainly making a Fed rate cut less likely in the short-term and although the European Central Bank (ECB) might be reluctant to cut its rate again, policy reticence won't necessarily spare the Euro from more losses.
"We doubt the fall in EUR/USD has gone unnoticed in Washington. We think 1.0900 may be the low point for EUR/USD this week, not lower, because equities look fragile and a correction could trigger a short squeeze in the EUR and secondly the risk of Washington trying to talk down the dollar," says Chris Turner, head of strategy at ING.
Above: Euro-to-Dollar rate shown at daily intervals.
The Euro: What to Watch
The Euro ceded ground to many rivals last week and in doing so provided company to Sterling as one of the worst performing major currencies, which is a trend that might be set to continue over the coming days.
Europe’s single currency was one of many to fall victim to a stronger Dollar although the Eurozone was also a source of woe for the continent’s unified unit as German data ate away at the short-term prospect of an economy recovery.
Friday at 07:00 marks the release of the initial estimate of German GDP growth for the final quarter while 10:00 of the same morning will see the unveiling of Eurostat’s second guess at Eurozone GDP growth, which was preliminarily estimated to be 0.1% last month.
Consensus is looking for German growth of 0.1% to be followed by a reiteration of the 0.1% already projected for the Eurozone, although after last week’s numbers the risks could be to the downside.
“The 3.5% plunge in IP in Germany and the 2.8% plunge in France were far weaker than expected and raises the likelihood of a contraction in euro-zone real GDP in Q4 when the data is released next Friday. This of course is a picture of the economy ahead of the coronavirus impact that will undoubtedly hit activity in Q1,” says Lee Hardman, an MUFG colleague of Halpenny's.
German industrial production and factory orders data revealed sharp falls in output from the foremost pillar of Europe’s largest economy last week, just days after retail sales were also seen contracting at year-end.
French and Italian GDP growth was already negative in the final quarter and if Germany went the same way it would then mean three of the continent’s largest economies shrank in the last three months of 2019.
That outcome would be unfortunate for the Euro, which broke to the downside from a four-month trading range last week, not least of all because the U.S. economy is still standing tall in the face of slowing growth everywhere else.
“This notable turn in IP data across key countries in the euro-zone (Spain & Netherlands data were also very weak) comes in the same week as ECB President Lagarde stated that the scope for monetary easing has become very limited to deal with external shocks like coronavirus. Markets may conclude that the FX channel is now the primary tool available for countering negative growth shocks going forward,” Hardman warns.
The Euro has long been hampered by a disadvantageous interest rate differential with the U.S. and many others although the Euro-Dollar differential is becoming more entrenched with every outperformance by the U.S. economy and is again weighing heavily on the single currency.
It’s not just economic numbers that will matter to the Euro this week, however, because investor risk appetite will also be important. This means headlines about the spread of coronavirus in China and beyond are also key.
Uber low interest rates at the European Central Bank (ECB) have given the Euro ‘funding currency’ status, which sees it borrowed and then sold in order for investors to fund bets on higher yielding assets when the mood in global markets is upbeat, only for it to be bought back during times of risk aversion as the same investors seek to exit their bets on greener pastures further afield.
Those greener pastures are often emerging market currencies, which all tend to do badly when the global growth outlook is called into question in the way that it could still be if either Eurozone data remains dire or if the coronavirus newsflow deteriorates again. The outbreak in China is far from over and the risk of outbreaks in other countries is anything but negligible, while the ongoing economic standstill in China was already expected to deal a severe blow to global growth in at least the first quarter.
China’s National Health Commission declared a total of 811 deaths at the weekend, taking the tally above the 774 who died from the Severe-Acute-Respiratory-Syndrome (SARS) in 2002-2003. There are now 37,198 confirmed cases of the disease in China, up from 14,380 at midnight on February 01.
The Dollar: What to Watch
The Dollar was the second best performing major currency last week after the U.S. economy reminded investors repeatedly of its exceptionalist credentials which are not only entrenching a substantial interest rate advantage over the greenback’s rivals, but also threatening to boost the currency again this week.
Thursday and Friday will see inflation and retail sales figures released for the month of January and given multiple recent signs of a New Year acceleration in the world’s largest economy, markets will scrutinise the data closely for further signs of outperformance.
Consensus is looking for the annual rate of inflation to have ticked higher from 2.3% to 2.4% last month although the more important core rate of price growth is seen slipping lower from 2.3% to 2.2%.
Meanwhile, retail sales are seen growing by a steady month-on-month pace of 0.3%, although growth in the more important ‘core’ measure is expected to have slipped from 0.7% in December to 0.14% last month.
“January data have taken on a more positive tone. The ISM surveys point to solid goods and services output, while January employment rose 225k,” says Michael Gapen, chief U.S. economist at Barclays. “We look for a modest 0.2% m/m rise in core retail sales, following a strong increase in December...We expect a solid increase in core CPI to have been offset to some extent by softness in energy and food prices. For core CPI, excluding food and energy, we forecast an increase of 0.2% m/m and 2.3% y/y.”
The Dollar has recoiled against many major currencies since Wednesday and has increasingly cut short an earlier rally in so-called risk assets since mid-week, given further signs of renewed divergence between the U.S. economy and those elsewhere in the world.
That curtailment was most evident in Australian Dollar exchange rates Friday although concerns about the outlook for the global economy have been best highlighted by price action in the Euro-to-Dollar rate, which has broken decisively to the downside from a four-month trading range this week.
Growth divergence between the U.S. and the rest of the world threatens to further entrench the Dollar’s interest rate advantage over other currencies. That advantage is a rate differential that reaches close to 2% against some currencies, making the Dollar attractive as well as expensive to wager against.
“There doesn’t appear to be much in the way of further [Dollar Index] upside, we revise up upside target from 98.0-98.5 to 99.0 on 1mth horizon; US data surprise indices are at cycle lows and OIS markets price in an (excessive?) 45% probability of an FOMC cut by 29 April,” says Richard Franulovich, head of FX strategy at Westpac. "US has a smaller direct trade exposure to China than many others. An impressive array of key US data have been reassuringly upbeat too, including ISM surveys, ADP payrolls and durable orders."
Euro-to-Dollar woes explain a sizeable portion of gains in the Dollar index for this week as well as for 2020, with the Euro down 2.22% over the last month while the Dollar Index has climbed 2.28%.
The Euro has a more-than 50% weighting in the benchmark of the U.S. currency, although Pound Sterling has around a 10% share so losses for the British currency can also aid the greenback meaningfully.
“The most significant driver in global markets remains coronavirus developments. Specifically investors are looking closely at the pace of new infections, for signs of any effective treatments and what measures the authorities and the private sector are taking to limit the outbreak. We will be looking for clues on the scale of the impact on the economy,” says Philip Shaw, chief economist at Investec. “The Democratic New Hampshire primary takes place on Tuesday. Joe Biden needs to put in a better performance there than in Iowa to prevent losing excessive momentum, although next week’s results may overstate underlying support for Bernie Sanders.”
Other key factors for the Dollar in the week ahead include developments in the spread of coronavirus both inside and outside the borders of China, as well as the Democratic Party process for choosing its 2020 presidential candidate.
Coronavirus concerns have the capacity to foster risk aversion among investors, which would always benefit the safe-haven Dollar at the expense of the Pound and all other major currencies except the Japanese Yen and Swiss Franc.
“Coronavirus developments remain in full focus but the poor performance of Joe Biden this week in Iowa does point to greater risks of a Bernie Sanders victory. That though might not disrupt USD sentiment if President Trump’s approval ratings and probability of winning in November rise. We expect politics to begin to gain more focus in the markets. National polling on Sanders v Trump will prove most important,” MUFG's Hardman says.
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