30 Apr 2019 | 09.40 am
Trading Markets With Capital.com
Is all the bad news for the euro out in the open?
30 Apr 2019 | 09.40 am
DAVID JONES (PICTURED), CHIEF MARKET STRATEGIST WITH CAPITAL.COM, PROVIDES LIVE MARKET UPDATES DAILY ON THE CAPITAL.COM YOUTUBE CHANNEL. HERE, HE DISCUSSES PROSPECTS FOR THE EURO IN THE COMING MONTHS
Perhaps naively, I thought that this month I would be writing about the euro/sterling exchange rate after Brexit. As of writing, the logjam is still continuing, though there is more clarity surrounding the single currency.
Make no mistake, the eurozone economy is not exactly in the best of health. The Italian economy has slipped into recession once again. This is the third time this has happened in the last 10 years, so financial markets are reasonably relaxed about that.
However, the powerhouse German economy narrowly missed going into recession in Q4 2018, with growth of 0% following a slight contraction in the previous quarter.
This has forced the hand of the European Central Bank. In March, the ECB stated it would not be raising the eurozone’s base interest rate until 2020 at the earliest, having previously signalled that a rate hike was possible this summer. The ECB also cut its growth forecast and offered more cheap money to banks. Clearly, the ECB is worried by the storm clouds that have gathered, including the Brexit factor.
Not surprisingly, the euro came under some pressure in early March, with the euro/US dollar exchange rate slipping below 1.12. What is interesting here is that there wasn’t a sustained wave of selling of the euro in response to this more negative outlook. After this trip down to its worst level in more than 20 months, the €/$ rate bounced back into the trading range it has been stuck in since last November.
When markets do something that seems illogical it can be a sign that all of the news (good or bad) is ‘priced in’. In a nutshell, the ECB’s outlook is hardly a surprise, given the weak economic data in recent months.
Financial markets are always looking forward and don’t just react to news as it is released. The fact that the euro did not plunge deeper on this latest downbeat forecast could be one of the first signs that we are seeing a shift in sentiment towards the single currency.
We do not need to start filling our wheelbarrows with euros just yet, as foreign exchange markets turn around with the agility of an oil tanker. It would be over-optimistic to expect the euro to go soaring higher against the US dollar in the short-term.
But with so much negative news coming out in Q1 and the euro holding relatively firm, perhaps it points to a rosier few months ahead.