Morning Brief – Which is to blame?

Charles Porter
Thu 28 Sep 2023

Which is to blame?

With EURUSD continuing to drive lower, it is important to question whether underlying concerns about the Euro or optimistic views amongst US Dollar bulls are responsible for the collapse in the pair. Whilst of course the answer is both, there seems to be an over emphasis within market commentary on the role of the US bond sell off in driving the weakness in EURUSD. You may question why, if both factors are driving the pair in the same direction, does analysing the source of the momentum matter? 

The answer of course is that the high degree of economic uncertainty means that sentiment could change quickly undermining either factor. Should Eurozone growth expectations pick up or demand for US Treasuries grow, we could only analyse how sensitive EURUSD would be to such independent moves if we know to what extent each is responsible for the move to date. In many currencies it would be simple to look outside of the pair in question to analyse each currency’s performance within other liquid FX crosses. Unfortunately, when contemplating EURUSD, due to the size of each currency union and the trade integration between the two geographies, that option is not available to us. The trade weighted value of each currency is so dependent upon the valuation of EURUSD itself that we can scarcely analyse the value of each currency independently.

If the sell-off in US treasuries continues to deliver 10-year yields to the 5% level, EURUSD would likely have a chance to reach parity once again. However, current projections would suggest that this would only be achievable if Eurozone growth expectations remain on the back foot. Due to the overstated role of US treasury pricing on the current decline in EURUSD, it seems that an (unlikely) revival in Euro area growth expectations would have an outside impact in correcting EURUSD higher. A further leg lower in EURUSD yesterday accompanied a quiet day for data in the Eurozone. There is far more data due out today and tomorrow regarding inflation and unemployment in core Eurozone countries.

Discussion and Analysis by Charles Porter

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