Euro slide resumes as market focus shifts to Federal Reserve hikes

Enrique Díaz-Álvarez02/Μαρ/2015Currency Updates

The agreement between the Greek Government and Eurozone authorities, for the extension of the current bailout, failed to boost the Euro. As Greece fades off the newsfeeds, markets are focusing more on the divergence in monetary policies between the Eurozone on one hand, and the Federal Reserve and (to a lesser extent) the Bank of England on the other. Therefore the announcement of stronger than expected durable goods and housing data in the US on Thursday was enough to send the common currency down over 1% against the greenback, to fresh multi-year lows. Sterling managed to hold its own against the Dollar, while emerging market currencies stabilised somewhat, amid generally positive attitudes towards risk assets.


Not much in the way of fresh economic news out of the UK last week.

The main release of note was the revision of fourth-quarter GDP numbers, which left overall growth slightly higher at 2.2% QoQ SAAR. The growth breakdown was mixed. On the positive side we saw strong performance in net trade (stronger than the overall headline) that puts to rest for now concerns about the impact of currency strength on the UK recovery.

More negative was the second consecutive drop in business investment, on the back of lower energy investment. However, we expect that high levels of business confidence (according to the surveys) will result in a significant rebound in this category in the first quarter of 2015, when we expect overall growth to accelerate modestly to around the 3.0% level and provide justification for a fourth-quarter interest rate hike by the Bank of England.


The positive outcome in the negotiations between the new Greek Government and the Eurogroup failed to boost the Euro.

Nevertheless, the agreement was a surprisingly reasonable result from the acrimony of the past few weeks. Greece will get flexibility as regards the budget surplus targets for this year, and word was leaked over the weekend that the Eurogroup will not take too hard a line about next year’s goals either. In return, the Greek Government’s proposals, particularly with regard to the critical issue of tax collection, are (in the most part) going in the right direction.

Macroeconomic developments in the Eurozone last week were also surprisingly positive. The European Commission economic sentiment index picked up in February on the back of improved consumer outlook. News from Italy was particularly encouraging, a welcome development for the country that, up until now, has been holding back the modest recovery of the Eurozone. However, neither this news nor the resolution of the Greek impasse, appears to have changed the negative sentiment around the Euro, which continues to hit weekly multi-year lows against both the Dollar and Sterling.


We received modestly positive news last week from the US business investment and housing sectors, which have been the laggards in the US over the past few months.

Core capital goods shipments finally managed a 0.3% increase for the month, after a couple of dismal months. New home sales in January increased 3.3%. Fourth-quarter GDP growth was revised down to 2.2%, but this revision was paradoxically a positive; accounted for by a downward revision in inventory accumulation, which bodes well for future growth. The initial estimate of final domestic demand was revised up from 2.8% to 3.2%.

All in all, it is clear that interest rate hikes are coming sometime this year, although the exact timing and pace will depend for the most part on the evolution of the labour market.


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.