Weak US and UK growth fuels Euro rebound

Enrique Díaz-Álvarez05/May/2015Currency Updates

The sharp countertrend rally in the Euro continued last week, as the common currency broke out of its recent range to end the week up 3% against both Sterling and the US Dollar. This move was unusual both in its size and consistency, and was helped by weak first-quarter GDP numbers from both the US and the UK, as well as the continuing clearing of the massive speculative position built on bets of further US Dollar rallies. Traders’ data suggests that a number short Euro/long USD positions had been cleared out by early last week, although investors are still significantly positioned long Dollar.

It is clear that the resumption of the US Dollar rally will have to wait for either good macroeconomic news out of the US, or a much more thorough clean out of market positioning.


First quarter GDP growth in the UK disappointed, coming in below market (and our) expectations. Annualized growth was just 1.2%, considerably below the 2.0% that most economist expected. It is true that the first estimate tends to be heavily revised as more quarterly data becomes available, but nevertheless, the slowdown was fairly broad based. Further, the April manufacturing sentiment PMI index also came below expectations, dropping sharply from 54 to 51.9.

The economic disappointments led markets to further delay expectations for the first Bank of England interest rate hike, and weighed heavily on Sterling. The Pound fell sharply against the Euro and, unusually, also dipped against the US Dollar. All eyes now turn to the General Election and the uncertainty over whether a stable Government can be formed.


For the second week in a row, Eurozone data was mixed, suggesting that the acceleration in growth seen since the start of the ECB’s quantitative easing policy may be due for a breather.

Economic sentiment fell slightly, confirming the negative signal from last week’s PMI. March retail sales provided another negative surprise. German sales fell by 2.3% (albeit from a high level) and sales in the Eurozone as a whole fell 0.8%. These numbers had been very strong up until March, and the March drop leaves sales growing at a still healthy 3% rate for the quarter, but there is a certain loss of momentum in consumption.

The Euro remained unfazed by all of this. The disappointments in the UK and US, together with more positive noises coming from the negotiations between the Eurogroup and the Greek Government, fuelled a very sharp rally that left the Euro hovering near the 1.12 level against the Dollar.


Headlines last week in the US were dominated by the negative surprise in first-quarter economic growth.

The numbers did indeed look grim, posting a barely noticeable growth of 0.2% (vs. expectations of around 1%). The key question remains unanswered: is this slowdown a consequence of postponed expenditures due to the exceptionally harsh winter weather, or symptom of a longer-lasting economic slowdown? The FOMC statement last Wednesday was noncommittal, stating that it was “party due to temporary factors”. The latest data suggests the former; weekly jobless claims last week fell to the lowest level in 15 ears, while the Employment Cost Index revealed that wages are now increasing at 2.6% YoY, a number that is clearly on an upwards trend.

Next week’s payroll report will be used by economists to gauge the speed of the US recovery from the winter doldrums. This data release takes on added importance this month.


Written by Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.