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5 Reasons For Euro’s Decline

Published 02/13/2019, 03:52 PM
Updated 07/09/2023, 06:31 AM

Daily FX Market Roundup February 13, 2019

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.

After months of confrontational language, President Trump is softening his tone on trade and getting close to signing a border deal that would end the funding crisis. It is not yet a done deal but it needs to be approved by Congress by Friday and signed by the president by Saturday to keep the government running. Although Trump expressed some initial dissatisfaction with the agreement as it only provides funding for 55 miles of new barriers along the southern border, he hasn’t said much beyond that. Everyone from the Democrats to Republicans and the president want to avoid another shutdown so despite his lack of commitment, all signs point to an agreement because in Trump’s own words, “a shutdown would be a terrible thing.” He even downplayed the lack of wall funding when he tweeted Tuesday that the deal will provide almost $23B in border security. With the US funding crisis behind us, investors will be focused on trade and according to Trump, the “trade deal with China is going very well.” Chinese President Xi is expected to meet with Mnuchin and Lighthizer on Friday in return for Trump receiving Vice Premier Liu He in Washington during his visit to the US. Trump’s flexibility with the March 1st deadline is also a step in the right direction and according to a spokesman for the USDA, the two presidents could meet in March. Today’s US CPI report did not curtail the dollar’s rally even though CPI growth stagnated for the second month in a row in January. Year-over-year price growth slowed to 1.6% from 1.9%. PPI, retail sales and jobless claims are scheduled for release Thursday and while investors expect spending growth to slow, higher wages and solid holiday shopping means the report could beat, which would drive USD/JPY comfortably above 111.

Wednesday's worst-performing currency was the euro, which gave up Tuesday’s gains to end the NY session at its lows. There are no shortages of reasons for the euro’s decline but the biggest pressure comes from:

  1. Continued softness in EZ data
  2. US Budget deal optimism lifting USD
  3. Lower German yields
  4. Prospect of weaker EZ GDP Thursday
  5. Political trouble in Spain

Although industrial production fell more than expected, the sell-off was driven by the rising dollar and political trouble in Spain. Parliament rejected the government’s 2019 budget bill, forcing the prime minister to consider an early general election. The last time this happened was more than 2 decades ago. Prime Minister Sanchez is expected to make a decision on calling the elections by Friday and if his government falls, a right-wing coalition government could take over, which would be very bad for the euro. German and Eurozone fourth-quarter GDP numbers are due for release on Thursday and given the sharp decline in retail sales and the central bank’s general concerns, the risk is to the downside.

Meanwhile, sterling u-turned after hitting a high of 1.2960. It was no surprise to see inflation fall more than expected in January and for the year-over-year rate to slip underneath 2%. In the past week, Theresa May asked Parliament for 2 more weeks, reaffirmed her commitment to leaving the EU on March 29 and said no deal is still on the table. The Labour party doesn’t want the Prime Minister to run down the clock and is pushing for a hard stop of February 26 on her process. She’ll need to either present her new deal for vote or allow parliament to take control. Given the resistance of the EU, Tory Brexiters and other parties, May is setting up for defeat, which is why we continue to believe that sterling should be trading lower and not higher.

Wednesday's best-performing currency was the New Zealand dollar but all of its gains were made right after the Reserve Bank of New Zealand’s monetary policy announcement. Apparently investors felt that the RBNZ was not dovish enough even though they pushed back their forecast for a rate increase to early 2021 and said they plan to keep interest rates at current levels through 2019 and 2020. Part of the reason is because the central bank sees growth picking up this year with employment near its maximum sustainable level. While a rate cut may be needed if growth doesn’t accelerate, RBNZ Governor Orr did not feel that the chance of easing increased over the past 3 months. The Australian and Canadian dollars were virtually unchanged with stronger consumer confidence supporting AUD and higher oil prices limiting the slide in the loonie.

Latest comments

thank you
this data are helpful
"These are" or "this is." Pick one.
Quite resonable
no german good data no euro party .. rest of states with euro currency are worthless. debts, bad budget, lesser gdp and bigger unemployment rate..event not surprised brexit would badly hit eur and drop below 1.10 levels and lower. Brexit, then hope czexit and another exits.. eur is becaming more dead when big influence USD
when?
thank you
Worth noting that this is a world movement, as its not isolated to the EZ. Many causes, but growing wealth disparity between rich (few) and the general populace (many) is likely the main driver...and with AI, machine learning, robotics taking flight now across every industry on the planet, this disparity is about to get significantly worse.
Political (Brexit, Grexit, Italexit, Frexit...and EU elections in May -huge political changes/uprising against the EU integration, common currency, immigration policies, etc), social (unrest...everywhere) , financial (DB and other weak banks) and economic (recessionary numbers throughout the region, including Germany).  EURUSD parity in 2019. and likely to fall/breakup in short years ahead.
Euro shuold goes up not down madam
did u even read the article?
I am very surprised with your pontifical Spain right- wind disaster for euro. Sorry, Euro will fire just un case
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