Euro drops to three-year low as markets look past coronavirus scare

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17 February 2020

thomasdodds

Risk assets and emerging market currencies bounced back last week as markets remain confident that the economic damage from the Coronavirus epidemic will remain contained and manageable.

T
he change in methodology that caused a spike in reported numbers did not change this fundamental view. However, this is not helping the Euro, which fell last week to its lowest point in years, as traders look to find risk-seeking carry trades using low-yielding currencies and economic data out of the Eurozone continues to paint a picture of near-stagnation. Meanwhile, Sterling was the best performing currency in G10, buoyed by signs that the Johnson government is ready to add fiscal stimulus to the UK economy.

Next week is a key one for the Eurozone. On Friday we get the advance reading of both the PMI indices of business activity and Eurozone inflation. The former is really the first major indicator outside China to reflect the impact of the Coronavirus outbreak so there may be some currency volatility around this release Friday morning.

GBP

Sterling bounced back strongly last week as the reshuffle in Johnson’s cabinet was read as a move towards looser fiscal policy in the upcoming Spring budget. The Pound will be tested this week as a slew of key data comes out, including the flash PMI indices of business activity, the labor report, and inflation. These are all backward-looking indicators, however. For now, Sterling has emerged as a key indicator of risk appetite, and if our view that the Coronavirus outbreak is going to remain largely contained in China pans out, there is room for a continuation of the Pound;s rally over the next few weeks.

EUR

Industrial production and GDP growth numbers in the Eurozone came out largely as expected, which is to say relatively weak. Economic growth remains sluggish but on the plus side employment growth remains healthy. The market chose to focus on the former, sending the Euro to multi-year lows on Friday. It is possible that we may have to wait for the fiscal stimulus that the ECB is requesting before we see a sustained rally in the Euro.

USD

Economic data out of the US last week was mostly second tier, with the exception of CPI inflation whose core measure remains healthy and comfortably above the 2% Fed target (though other measures are slightly lower). The democratic primaries so far, where left-wing Sanders continues to be the front runner, have so far had little impact on financial markets. This may change this week and next as primaries are held in more populous and representative states like Nevada on February 22nd and South Carolina on February 29th.