Three reasons why the Euro sold-off on Monday
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5 March 2019
Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.
The common currency got off to a difficult start to the week on Monday, finally breaking out of its recent range and sliding by over half a percent against the US Dollar to its weakest position in over two weeks. But what was behind the sharp downward move in the Euro?
- US bond yields continue to march higher: US bond yields extended their advantage over comparable rates in Germany on Monday, the spread of which has risen to its highest level in three months. A rising appetite for carry trade strategies and increased optimism regarding a US-China trade deal can be cited for much of the move, of which makes US assets that bit more appealing to foreign investors.
- Investors eye dovish European Central Bank: The ECB will be announcing its latest monetary policy announcement on Thursday. While no change in policy is expected, the market is bracing for another very dovish turn from President Mario Draghi. Recent economic news out of the Eurozone has been poor, particularly the business activity PMIs. We are now likely to see a downward revision to growth forecasts for 2019 from the previous 1.7% pencilled in back in December. There is also a risk of a fresh round of TLRO’s being announced – a series of long term loans issued by the ECB to European banks.
- EUR/USD falls below moving averages: From a technical trading stand point, we’ve also had a rare convergence between the 1-week, 1-month and 3-month moving averages in EUR/USD in the last few days. The spot rate fell below all of these during the course of Asian and European trading on Monday, the first time this has occurred since September (Figure 1).
Figure 1: EUR/USD 3M, 1M & 1W Moving Averages (Jan ‘19 – March ‘19)
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Is an Article 50 extension on the horizon?
There is now only one week to go until Theresa May’s withdrawal bill is set to be voted on again in the House of Commons and currency traders are becoming increasingly on edge.
With negotiations with Brussels seemingly yielding very little, it looks as though the WA put forward to MPs next week will be very similar, if not identical, to the one proposed back in January. Despite reports that some MPs could be shifting allegiances in favour of May’s deal, this is highly unlikely to be enough and the Prime Minister looks set to concede to a delayed Brexit.
In the interim, this morning’s UK services PMI beat expectations at 51.3 versus 49.9 expected, although this only caused a modest upward move in Sterling.
Eurozone PMIs recover, slew of US data out today
A slew of economic data is scheduled for release in the US this afternoon, which could give us a decent indication as to the strength of the world’s largest economy. The main data point will be ISM’s measure of non-manufacturing activity at 3pm UK time. As a leading indicator for Friday’s nonfarm payrolls report, this is likely to garner plenty of attention from traders today.
It is worth noting that PMI data out of the Eurozone this morning was better-than-expected, although only resulted in a modest upward move in the Euro. The key composite PMI jumped back to a far more healthy 51.9 in February from the previous 51.0 estimate. The lack of reaction from the market suggests that they view this as too little, too late to materially impact the ECB’s policy stance when it commences its two-day meeting tomorrow.
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