Data driven decline
There have been episodes in recent memory where, albeit fleetingly, the Eurozone economy has been perceived to relatively outperform versus the US economy. Those periods have often been short-lived with macroeconomic risks tending to have driven investors back towards the dollar despite changing fundamentals. Following weak data in the US last week, it seems that we may just be back in one of those elusive periods. Let’s take a look at the data first: following a decision by the federal reserve to hold rates despite significant market interest for a hike, it was CPI and retail sales that sent the dollar packing once again. Jobs data has also since undermined demand for the US dollar given the Fed’s dual mandate.
Now, in contrast to this, Eurozone economic surprises have been declining. In fact, when we look at the economic surprise indicator and subtract the US economic surprise index from its EU counterparty, we find this hybrid metric sitting at his highest level since 2023. That is a positive influence for the euro and therefore the EURUSD exchange rate. Despite the Strait of Hormuz remaining firmly closed, and looking to stay that way until after the US midterms, commodity prices have remained contained well within recent ranges. Despite mild commodity price appreciation we are observing via ongoing data releases that the US economy is accommodating higher energy costs better than might have been expected.
All of this could be leading short-term flows into the euro. Looking at the three major central banks, the BOE, ECB and Federal Reserve, the ECB is the only central Bank expected to hike (priced around 95% conviction) in September. Positioning in the euro is also excessively short allowing for the opportunity of euro buying when fundamentals appear to be improving. It would’ve been an expensive trade many times throughout 2025/6 to buy into any economic optimism stories around the Eurozone. Whilst the same is more than likely to be true this time around, it’s also not implausible the euro attracts a bid first.
Discussion and Analysis by Charles Porter
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