EUR / USD Rally Decline, Will European PMIs Recall Bulls?

Euro fundamental forecast: neutral

• Euro has not changed widely against its main peers
• Rally to the top of the EU has fizzled as focus shift to the ECB
• Rosy EU PMIs can stimulate Euro, followed by not a given

At first glance, it seems that the Euro has enjoyed strong lending since late. A closer look reveals that a disproportionate amount of their strength seems to be expressed against the US Dollar. Since the end of March, EUR / USD has risen by about 6.5%. Meanwhile, my major-based Euro index rose 0.2% over the same period, see chart below. The latest averages average EUR against USD, JPY, GBP and AUD.

Where the Euro is struggling is against the growth-linked Australian Dollar. This is understandably seen the recovery in world market sentiment since late March. This has consistently dipped anti-risk currencies such as the US Dollar and Japanese Yen. In fact, the performance in EUR / JPY this year is comparable to EUR / USD. Recently, the last bit of strength in the Euro happened after the EU summit deal on 21 July.

This opened the door to a EUR750 billion agreement working in tandem with aggressive demanding measures from the European Central Bank (ECB). These brought economic optimism and hardened in path to greater European integration. Since then, however, the Euro has remained broadly in a neutral setting. The focus may shift to announcing next month’s ECB interest rate.

This past week, the minutes of the July meeting of the ECB marked that policymakers expect more clarity on the outlook for inflation in September. Until then, the central bank could wait until fresh personnel projections to decide on the way forward for unconventional measures. Meanwhile, spiked cases of coronavirus in Germany have resulted in leaders ruling out a further redemption in protective measures.

With that in mind, the path of the Euro can remain fairly neutral. Most volatility could come against USD, JPY and AUD as they interact with global stock markets. Recently, economists have tended to underestimate the health and strength of the regional bloc. Maybe pink Markit PMIs from France, Germany and the Eurozone can boost the Euro. Follow may have to wait until the ECB chooses his next path.

Euro strength as weak US dollar?

Graph made in TradingView

* Majors-based Euro Index averages EUR against: USD, JPY, GBP and AUD

— Written by Daniel Dubrovsky, Currency Analyst for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter