The Euro May Launch Higher if the ECB Holds Back Dovish Posturing
The Euro May Launch Higher if the ECB Holds Back Dovish Posturing
By:Ilya Spivak
The currency has been grinding upward since posting a two-year low just above 1.03 against the U.S. dollar
- The euro is up from two-year lows, thanks to a retreating U.S. dollar.
- Macro headwinds battering the Eurozone are becoming stronger.
- If the ECB withholds more dovish guidance, the euro may push up.
For all the headwinds battering the euro recently, it has been remarkably resilient against the U.S. dollar. The currency has been grinding higher since posting a two-year low just above 1.03 against the U.S. dollar in late November. That put the brakes on a blistering down move of nearly 8% from highs above 1.12 in late September.
The sell-off developed in line with a broader dollar rally following the start of interest rate cuts by the Federal Reserve. The markets judged that the central bank’s dovish posture coupled with brisk U.S. economic growth would revive inflation pressure. This fueled a downshift in the rate cut outlook for next year, lifting Treasury yields and the greenback.
The Eurozone is facing mounting macro headwinds
The same dynamics have delivered the euro rebound in the past two weeks. The U.S. “reflation trade” seemingly ran out of steam after the Federal Reserve’s November policy meeting as near-term policy expectations calcified, giving the markets room for the unwinding of speculative exposure.
Meanwhile, the local story in the Eurozone has seemingly gone from bad to worse. First, the economy has slipped back into recession-like conditions. November purchasing managers index (PMI) data from S&P Global showed growth of economic activity contracted at the fastest pace since January. A modest pickup earlier in the year has lost steam.
Credit stress has also returned. The collapse of the fragile minority government in France has sent its bond yields soaring. The markets are worried that embattled President Emmanuel Macron will struggle to pass a budget. The spread between French and German 10-year rates is at its widest since mid-2012, amid the Eurozone debt crisis.
The euro may rise if the ECB withholds dovish guidance
Inflation expectations are annoyingly marching higher even as the economy hits the skids and electricity prices move up ahead of peak winter usage. One-year forward French and German baseload power prices have been rising on the European Energy Exchange (EEX) since mid-September.
.png?format=pjpg&auto=webp&quality=50&width=1000&disable=upscale)
All this makes for a thorny backdrop as the European Central Bank (ECB) convenes a policy meeting this week. The central bank is widely expected to cut its target deposit interest rate by another 25bps to 3%. The priced-in probability of the move stands at close to 76%, based on benchmark ESTR rate futures.
That is likely to shift traders’ focus on the guidance about what is likely ahead in 2025. As it stands, the markets anticipate a further 115bps in cuts next year. If the many crosscurrents facing the central bank distill down to indecision and it opts for a neutral “wait-and-see” message to the markets, the euro may rally with relief.
Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
For live daily programming, market news and commentary, visit tastylive or the YouTube channels tastylive (for options traders), and tastyliveTrending for stocks, futures, forex & macro.
Trade with a better broker, open a tastytrade account today. tastylive, Inc. and tastytrade, Inc. are separate but affiliated companies.
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.
tastylive content is created, produced, and provided solely by tastylive, Inc. (“tastylive”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, digital asset, other product, transaction, or investment strategy is suitable for any person. Trading securities, futures products, and digital assets involve risk and may result in a loss greater than the original amount invested. tastylive, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastylive is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparisons, statistics, or other technical data, if applicable, will be supplied upon request. tastylive is not a licensed financial adviser, registered investment adviser, or a registered broker-dealer. Options, futures, and futures options are not suitable for all investors. Prior to trading securities, options, futures, or futures options, please read the applicable risk disclosures, including, but not limited to, the Characteristics and Risks of Standardized Options Disclosure and the Futures and Exchange-Traded Options Risk Disclosure found on tastytrade.com/disclosures.
tastytrade, Inc. ("tastytrade”) is a registered broker-dealer and member of FINRA, NFA, and SIPC. tastytrade was previously known as tastyworks, Inc. (“tastyworks”). tastytrade offers self-directed brokerage accounts to its customers. tastytrade does not give financial or trading advice, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastytrade’s systems, services or products. tastytrade is a wholly-owned subsidiary of tastylive, Inc.
tastytrade has entered into a Marketing Agreement with tastylive (“Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’s brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade. tastytrade and Marketing Agent are separate entities with their own products and services. tastylive is the parent company of tastytrade.
tastycrypto is provided solely by tasty Software Solutions, LLC. tasty Software Solutions, LLC is a separate but affiliate company of tastylive, Inc. Neither tastylive nor any of its affiliates are responsible for the products or services provided by tasty Software Solutions, LLC. Cryptocurrency trading is not suitable for all investors due to the number of risks involved. The value of any cryptocurrency, including digital assets pegged to fiat currency, commodities, or any other asset, may go to zero.
© copyright 2013 - 2024 tastylive, Inc. All Rights Reserved. Applicable portions of the Terms of Use on tastylive.com apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastylive’s podcasts as necessary to view for personal use. tastylive was previously known as tastytrade, Inc. tastylive is a trademark/servicemark owned by tastylive, Inc.