Euro-dollar draws confidence from ZEW data and USD Ebbing
– EUR / USD targets February highs
– USD drops, European FX outperforms
– Confidence in EZ and global recoveries increases
Image Â© Alfred Yaghobzadeh, Audiovisual Services of the European Commission.
- EUR / USD spot at publication: 1.2166
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The Euro-dollar exchange rate outperformed alongside a handful of other European currencies on Wednesday amid the dollar’s further decline and after the latest ZEW survey confirmed that investors are increasingly confident in the outlook recovery in the euro zone.
Europe’s single currency was higher than all of its major counterparts on Tuesday with the exception of the Swedish krona, Polish zloty and Norwegian krone, in price action that gave the euro-dollar rate a clear trajectory around 1.22 and its highest since late February.
This is after the improving economic outlook was recognized by a growing number of analysts in the May iteration of the survey by Zentrum fur EuropÃ¤ische Wirtschaftsforschung (ZEW), with confidence measures for both Europe and Germany rising sharply.
The index reflecting the development of expectations for the euro area over the next six months rose 17.7 points to 84.0, helped by renewed optimism about the German economic outlook, where the index measuring the Confidence in the outlook has reached its highest level since 2000.
âThe surge in expectations suggests that the markets now believe in the best of all possible worlds; namely that a strong, albeit short-lived, economic recovery is about to begin, driven by an impressive second-quarter vaccine surge, and policymakers will not let their footing on the gas as the data Above-average economies are flocking this summer. and in the fourth quarter, âsays Claus Vistesen, chief eurozone economist at Macroeconomics of the Pantheon.
Above: Euro-Dollar rate displayed at daily intervals.
ZEW’s survey interviews around 275 institutional investors asking them to assess the relative conditions and outlook for the German economies and the Eurozone.
Tuesday’s barometer draws a line below the sharp drop seen previously in April, largely attributed to a third wave of coronavirus infections that saw activity restrictions tightened in a range of mainland countries.
It also echoes the message from other IHS Markit surveys suggesting that the European manufacturing and service sectors regained the upper hand last month.
All of this at a time when the continent is beginning to bridge the gap between itself and the United States in terms of vaccine deployment.
Above: trends in EU-US vaccination. Source: Goldman Sachs Global Investment Research.
EUR / USD forecast 2021
Period: From the second quarter of 2021
FX Guide for Businesses
âWe now expect the US and EU to reach the milestone of vaccinating 50% of the population around the same time (mid-June). This effectively fills in what we thought was a 6 week gap, âsaid Nikola Dacic, economist at Goldman Sachs.
Meanwhile, the global economy as a whole is entering a sweet spot, supported by U.S. monetary policy which keeps bond yields low across the Atlantic and elsewhere in the world and in so doing, supports the appetite for investor risk.
In addition and at the same time, Washington’s extraordinary public spending is helping to spur a recovery in activity that will effectively provide the rest of the world economy with a boost at the same time.
This had the effect of a widespread decline in the US dollar, which was very strong following last Friday’s April non-farm payroll report, but has since become a more measured decline.
Above: price and performance of the US dollar exchange rate.
âOur latest proprietary flows are strongly negative for the USD. Last week real money bought the USD but after substantial selling the week before and before what was a very weak NFP. Hedge funds continued to sell USD across the board. Official and corporate USD flows have also turned negative in recent weeks, âsaid Athanasios Vamvakidis, head of currency strategy at BofA Global Research.
The dollar has fallen against all currencies except for lower yields or just mediocre currencies in recent days, with exchange rates like USD / JPY and USD / CHF rising slightly even as the Euro-dollar rates and other European currencies were rising.
The weaker dollar has lifted EUR / USD, GBP / USD and a range of other European currencies in recent days, although growing confidence in the continent’s own economic outlook that was embodied by the ZEW survey of Tuesday implies the possibility of a local rally of the single currency later. this year, which is a popular idea with much of the market now.
“The reopening / vaccine path combined with surprises from the rising European data suggests new EUR strength from here, not weakness,” said Jordan Rochester, strategist at Nomura.
“We remain a long GBP / USD, as a high beta expression of the EUR / USD view.”