The Euro (EUR) was on the defensive over the last week with a weak performance on most crosses and against the US Dollar (USD).
The US currency has maintained a firm tone as the 10-year yield increased to an 8-month high.
Increased concerns surrounding the Chinese economy and fragile risk appetite have also undermined the Euro.
The Euro to Dollar (EUR/USD) exchange rate dipped to 6-week lows just below 1.0850 before a tentative recovery to 1.0870.
ING notes; “The pair is not just exposed to Chinese sentiment via the risk-environment channel, but more directly given the eurozone’s economic exposure to China. The question now remains: will the Chinese story catch up with the euro?”
Overall, EUR/USD will need Chinese stimulus and evidence of US deterioration to secure a sustained rebound.
The latest US data recorded a 0.7% increase in retail sales for July and an underlying increase of 1.0% for the month with industrial production also stronger than expected with a 1.0% increase for July.
Overall survey evidence has been mixed with a slide in the New York Empire manufacturing index while the Philly Fed manufacturing index rebounded to a 15-month high.
MUFG commented that firm data could be misleading; “That said, it is important to remember the turn of an economy from resilience to recession can be quite abrupt and quick. Looking back at the Control Group 3mth annualised rate you can see for example that there was growth of 6% in November 2007, the month before the NBER-determined recession began in the US.”
There has been no evidence of a shift in Federal Reserve stance, although comments have been relatively sparse over the past week, especially with the peak holiday season.
MUFG maintains a positive short-term dollar view; “the short-term bias remains favourable for the dollar and the minutes and the data support that view.”
HSBC commented on the Fed stance; “Policymakers continue to balance the risks of still elevated inflation against the potential downside risks related to restrictive monetary policy and tighter credit conditions.”
The dollar will also gain net support if risk appetite remains weaker.
According to SEB Group; “In essence we have a set-up near term where the USD can outperform either because US growth differentials improve vs rest of world or risk sentiment turns sour.”
The bank is more cautious over the medium-term outlook; “Beyond Q3 there is a risk that in particular softer inflation readings is going to lead to increased speculation of an earlier Fed pivot (cuts) which would weigh on the USD.”
According to Credit Agricole, when looking at real expected interest rates, the Euro has lost the advantage that has prevailed for much of the last 10 years.
It adds; “If this is to last in the long run, EUR/USD’s upside potential could at a minimum be curtailed, with the pair being more prone to trade in the lower (rather than upper) end of this year’s narrow range.”
There have been no major Euro-Zone data releases, but business surveys remain generally weak.
According to Nomura; “The euro area economy is stagnating, although we think the worst is already behind us.
It added; “While euro area inflation is likely to fall sharply in 2023, it should be well-above target for some time, and notably core inflation.”
The bank does not expect further ECB rate hikes but sees rate cuts only from the fourth quarter of 2024.
There have been increased concerns over the Chinese outlook which has sapped currency support.
According to BNPP; “July’s underwhelming performance suggests downside risks to our 5.3% y/y GDP forecast. It added; “Property slump, external downturn and cautious household still weighing on activities.”
Goldman Such further stimulus by Beijing which will help strengthen the economic performance over the next few months.,
The bank, however, remains cautious over the outlook. It added; “That said, we continue to expect below-consensus longer-term growth as the room for catch-up growth diminishes, exports no longer provide a meaningful tailwind to growth, and the demographic and property situation remains challenging.”
According to ING; “All in all, it does look like there is a path for the euro and other pro-cyclical currencies to weather this Chinese turmoil without taking much damage, but that also means a delay in any substantial rally against the dollar.”
The bank still has a 6-month EUR/USD forecast of 1.15.