- Euro’s bullish trend hit hard by Fed’s surprise hawkish tilt.
- High-frequency data indicates eurozone recovery.
- European Central Bank holds policy steady while raising growth prospects.
Spot (mid-market) rate = $1.1935 / USD (10:35am, June 24, 2021)
Euro’s bullish trend hit hard by Fed’s surprise hawkish tilt. The euro sold off last week following the Fed’s surprise hawkish tilt, declining nearly 2.5% and erasing many of the solid gains made during April and May.1 Over the summer, the euro may consolidate in light trading/lowered liquidity before resuming its long-term uptrend.
High-frequency data indicates eurozone (EZ) recovery. According to unofficial “mobility” indicators, economic activity in the eurozone rebounded in June, and is back to near pre-pandemic levels following EZ member states reopening their economies in May.
European Central Bank (ECB) holds policy steady while raising growth prospects. At its June 10 meeting, the ECB held interest rates and asset purchases steady, while raising its forecast for eurozone growth in 2021 from 4.0% to 4.6%.2 EU economists say the bloc could be fully recovered from the economic impact of the pandemic as early as September.3
Source: Bloomberg June 2021
Several factors are influencing the value of the euro:
High-frequency ‘mobility’ data shows rise in Eurozone economic activity. Several “alternative” economic indicators – the use of public transport, restaurant bookings, job postings and air traffic data – have reached their highest levels since pre-pandemic days, fueling expectations of a faster economic rebound in the eurozone.4 Germany, the EZ’s economic powerhouse, reported strong “mainstream” economic data: Manufacturing and Services Purchasing Managers’ Index (PMI) for June exceeded expectations, continuing a series of rising monthly PMI numbers.5
First recovery fund payouts to be distributed. The EU Commission signed-off on Spain and Portugal receiving their respective shares of the €800 billion recovery spending package. The Commission predicts that all eurozone members will return to pre-crisis output levels by the end of 2022.6
Pandemic is retreating. Covid-19 infections have fallen rapidly since May, and more than half of the eurozone population have now received at least one dose of a vaccine. However, there is growing concern about the spread of the more contagious and deadly Delta variant.7
EU political risks may unsettle investors. This weekend’s regional elections in France may demonstrate a lack of support for President Macron’s centrist La Republique en Marche party, and vulnerability ahead of next April’s presidential election.8 In Sweden, a no-confidence vote for Prime Minister Lofven is throwing politics into turmoil as the country grapples with the rise of a large, populist, anti-immigration party. Lofven may call snap elections, form a new government or resign.9 In Spain, Prime Minister Sanchez plans to pardon nine jailed Catalan separatists behind a failed 2017 independence bid, despite opposition to their release by 61% of the population.10
TECHNICALS: despite the recent sell-off, the EUR/USD’s long-term uptrend remains intact. Over the summer months, the euro may consolidate in a relatively wide trading range of $1.16-1.21, before resuming its uptrend in Q4 and beyond.
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