Can the euro’s strength continue?

One of the strongest currencies over the past month (other than the Australian dollar) has been the euro (versus the US dollar). From a low of USD 1.078 mid-May, the euro has rallied over 5% to almost USD 1.14, before easing to USD 1.126. The three-month move is shown in the chart below from UBS FX Strategy.

As the chart also shows, the macro matters. Well, at least it has in the past, with a strong correlation between the extent to which European data has surprised US data being a key driver over the past couple of years. More recently, US data has continued to surprise, arguing for a lower euro. Instead, the recent euro rally appears driven more by easing lockdown restrictions and optimism around the EU’s latest, more coordinated and somewhat belated union-wide fiscal stimulus. The US’s recent COVID-19 woes may also have contributed.

Given the now significant breakdown in the chart’s relationship, it seems likely from here that to hold the recent euro rally, the European data is going to have to start surprising versus US data. This week’s first look at June purchasing manager indices for both Europe and the US (tonight) will be a key part of this narrative and will likely impact the euro’s near-term outlook. For end-2020, both UBS and CBA forecast the euro to rally further to USD 1.15. Based on this chart at least, this suggests Europe’s macro data will need to positively surprise the US over the rest of this year.

Will EU data start to surprise—or will the euro correct its recent rally?

Source: Bloomberg, UBS.

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1 contributor mentioned

Scott Haslem
Chief Investment Officer
Crestone

Scott has more than 20 years’ experience in global financial markets and investment banking, providing extensive economics research and investment strategy across equity and fixed income markets.

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