Two factors ignited the recent flourish in EURUSD, the world’s most liquid and typically stable currency pair. Firstly, on Tuesday, Eurozone PMIs failed to show the descent into contractionary economic territory that many feared they were capable of. Whilst the index figure that aims to measure business appetite and confidence within the economy did show a contraction in May, falling at the composite (goods and services) level to 54.9 from 55.8, the figures were still considered constructive. Due to the way that the PMI indices are published, the figure above 50 still tilts the index towards economic expansion rather than contraction and at a robust pace at that given fears in the surrounding global economy.
The second factor as you may or may not be surprised to hear, came from the central bank, the ECB. The ECB has normally been a headwind rather than element of support for the Euro. As a central bank it has fallen into a similar category as the Bank of Japan continually dragging back market expectations for monetary tightening. However, monetary policy is of course a very common source of currency volatility and valuation changes.
Christine Lagarde, the President of the ECB talking at the world economic forum in Davos, announced her expectation to escape negative interest rates by the third quarter of this year. This was not too far outside of market pricing with considerable tightening having been priced into the rate curve for some time. However, to hear this frank confirmation from the President whose governing board and senior members have typically been highly dovish caught the market off guard.
On Wednesday, ECB member Klaas Knot said the ECB could not rule out a 50-basis point hike in July. This newly emerging and still developing hawkish rhetoric pushed the Euro back up from its lows. Unfortunately for Euro sellers, this could be where the encouraging news for the Euro ends. The rest of the governing Board including the President herself were swift to counterbalance this rhetoric with a return to the cautious and steady metronomic beat of the Bank.
With the stronger than expected PMIs priced into the Euro now and the hawkish rhetoric also priced in with some 1% of hikes priced into the curve by year-end, the correction in the Euro could have run out of speed. EURUSD has already failed to breakthrough its 50-day-moving-average, an important technical indicator in markets. It seems more likely looking ahead that the relief rally begins to falter and stall rather than reapproach figures in the 1.1s.
Discussion and Analysis by Charles Porter
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