Euro’s Reality Check Drags Currency Near Weakest Since May 2017
Euro’s Reality Check Drags Currency Near Weakest Since May 2017
(Bloomberg) --
Wishful thinking doesn’t cut it for the euro any more, especially not as it languishes near the lowest level in almost three years.
The common currency is heading for its sixth week of losses in seven, defying analysts’ expectations for a weaker dollar this year. It fell earlier as much as 0.2% to $1.0892 before steadying around $1.0914.
It’s a classic reality check for euro bulls: there is no hard data to spur gains, and the advance last year now looks driven by unfulfilled optimism.
Not least, hopes for a possible shift away from sub-zero interest rates at the European Central Bank look misplaced since the turn of the year. Neither has the prospect of fiscal stimulus from national governments moved nearer.
The ECB’s policy meeting in January revealed that a rate hike isn’t on the horizon. It also implied its long-awaited strategic review won’t deliver anything meaningful, at least until the policy meetings due in the summer. The market has shifted its bets to reflect higher odds that the ECB may actually lower rates this year.
Its president, Christine Lagarde, said on Tuesday that the ECB’s loose monetary policy is hitting savers and stoking asset prices, as she called on governments to do more to boost the economy.
And while fiscal stimulus wasn’t really expected any time soon, the list of unexpected threats to euro bulls has lengthened. Political troubles have resurfaced in the bloc, with German politics entering a period of turmoil and the radical and left-wing Sinn Fein faring well in Ireland’s general election.
The risk of the U.S. imposing auto tariffs to European imports, and the prospect of difficult talks between the U.K. and the EU over a trade deal are also keeping the common currency in check.
Meanwhile, the main unpredictable black swan event of the year, the spread of the coronavirus, has highlighted the haven appeal of the dollar, strengthening the U.S. currency.
Add in signs that an inversion in the U.S. yield curve might be saying more about the state of the world rather than the nation’s business cycle, and the outlook darkens.
The euro isn’t under pressure only in the spot market. Bets in the options market have turned bearish, ending a divergence with cash trading that had held since mid-January, with investors in both now showing a united preference for short exposure in the common currency.
Risk reversals show that sentiment over the one-week tenor in the euro is at its most bearish in more than four months amid a steep increase in demand for options that pay out on a big move in the currency lower. Options expiries over the next month show investors have been caught off guard with the dollar’s recent bout of strength.
- Technically, the common currency eyes a move toward the Oct. 1 low at $1.0879 with scope to test the gap at $1.0728-$1.0821 that was created after the France general elections in April 2017. A short-squeeze in the euro could target on the other hand a move above $1.10, where the 21- and 55-daily moving averages offer resistance
- NOTE: Vassilis Karamanis is an FX and rates strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice
To contact the reporter on this story: Vassilis Karamanis in Athens at vkaramanis1@bloomberg.net
To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Michael Hunter
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