Euro’s Slide Takes Currency to ‘Line in the Sand’ for Bulls

(Bloomberg) -- The euro is on the cusp of breaking new lows against major global peers, weighed down by the prospect of prolonged monetary stimulus from the European Central Bank and a rush for haven assets.

The common currency fell to as low as $1.1694 on Wednesday, the weakest since early November, to test the key $1.17 handle. That’s a level that capped the euro’s decline in April and which Nomura International Plc strategist Jordan Rochester is calling a “line in the sand” for euro bulls.

Traders are also recalibrating expectations for the currency’s performance against the Swiss franc, with the cross nearing its weakest level in a year. Against the Japanese yen, the euro is hovering around its weakest since February.

It’s a far cry from 2020, which saw the euro advance some 9% in its biggest gains for three years. Traders piled into the common currency at the time on Europe’s policy response to the Covid crisis and with the U.S. Federal Reserve keeping interest rates at rock bottom.

But unlike major central banks including the Fed and the Bank of England, the ECB has given little indication it’s ready to scale back its bond-buying program any time soon. That’s lessening the euro’s allure, already one of the worst-performing major currencies this month.

“The EURUSD continues to press down on the big 1.1700 area ahead of the FOMC minutes this evening, which are a possible trigger for the lowest levels of the year,” said John Hardy, the head of FX strategy at Saxo Bank. 

“A more pointed indication that many share the view on the Fed that tapering should begin sooner rather than later,” could see the dollar rally further, he said. The Bloomberg Dollar Spot Index was trading up 0.1% as of 11:45 a.m. in New York.

The relentless spread of the delta virus variant and the prospect of geopolitical turbulence spurred by the U.S. military’s chaotic evacuation from Afghanistan is also driving traders in to assets that tend to perform better when risk sentiment sours. 

One-week risk reversals, a measure of market positioning and sentiment, are trading at 13 basis points in favor of euro puts, which compares to a parity reading on Monday. 

Meanwhile, longer term sentiment is also worsening, with bearish bets on the euro increasing in price as April’s French election draws closer. The vote could see popular support for far-right politician Marine Le Pen and trigger market anxiety comparable to that seen around Brexit.

“Fears about the impact on global growth from the Delta variant particularly at a time when it looks likely that the Fed will be tapering is sufficient to keep the safe havens supported,” said Jane Foley, a strategist at Rabobank in London, who sees the euro slipping to $1.16 over the next six months.

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