EUR - FUNDAMENTAL DRIVERS
Fundamental bias: Weak bearish
1. Virus Situation
The outlook for EUR remains tied to the EU's ability to overcome its coronavirus pandemic. At present, the outlook appears to be moving from strength to strength as the EU is set to reach their goal of vaccinating 70% of their adult population by July. This means that one of the biggest hurdles to taking on a more constructive view on the EUR has been taken away and also bodes well for a potential faster recovery once more restrictions are lifted.
2. The Monetary Policy outlook for the ECB
Even though the FED and BOE are nowhere close to hawkish, they are far less dovish than the ECB, who has decided to front-load asset purchases in March. The growing rift among the GC could prove problematic when it comes to potentially altering policy in the months ahead. The June meeting has shown that the doves have won the fight for now as the bank retained their commitment to keep up PEPP purchases at a “significantly higher pace” compared to the start of the year. The bank did however recognise some of the recent positives in the data and changed their assessment on the risks to the economic outlook as no longer “tilted to the downside” but rather more “broadly balanced” (first change like this from 2018). However, the commitment from the bank to keep policy accommodative and to keep financing conditions favourable means they are still expected to be much slower to normalization compared to the likes of the BOC, RBNZ, BOE and the FED, especially with recent price pressures expected to be more temporary.
3. The country’s economic developments
The issues with the vaccination roll out and additional lockdowns at the start of the year weighed on EU growth prospects, with growth differentials for the EU versus the US and UK still wide, despite some of the recent strong economic data after the vaccination roll out finally got underway. Fiscal support is another factor where the EU Recovery Fund is yet to be ratified while the US and UK have both rolled out additional stimulus and plans more in the months ahead (US). However, recent activity data suggests the hit to the economy from the most recent lockdowns was not as bad as feared and data has surprised to the upside. Even though plenty of participants have positioned for a recovery in the EU, we think a lot of those positive expectations are already reflected in the price and think as the Dollar’s fate turns less negative the EUR might face an uphill battle to keep up with its recent appreciation.
1. Virus Situation
The outlook for EUR remains tied to the EU's ability to overcome its coronavirus pandemic. At present, the outlook appears to be moving from strength to strength as the EU is set to reach their goal of vaccinating 70% of their adult population by July. This means that one of the biggest hurdles to taking on a more constructive view on the EUR has been taken away and also bodes well for a potential faster recovery once more restrictions are lifted.
2. The Monetary Policy outlook for the ECB
Even though the FED and BOE are nowhere close to hawkish, they are far less dovish than the ECB, who has decided to front-load asset purchases in March. The growing rift among the GC could prove problematic when it comes to potentially altering policy in the months ahead. The June meeting has shown that the doves have won the fight for now as the bank retained their commitment to keep up PEPP purchases at a “significantly higher pace” compared to the start of the year. The bank did however recognise some of the recent positives in the data and changed their assessment on the risks to the economic outlook as no longer “tilted to the downside” but rather more “broadly balanced” (first change like this from 2018). However, the commitment from the bank to keep policy accommodative and to keep financing conditions favourable means they are still expected to be much slower to normalization compared to the likes of the BOC, RBNZ, BOE and the FED, especially with recent price pressures expected to be more temporary.
3. The country’s economic developments
The issues with the vaccination roll out and additional lockdowns at the start of the year weighed on EU growth prospects, with growth differentials for the EU versus the US and UK still wide, despite some of the recent strong economic data after the vaccination roll out finally got underway. Fiscal support is another factor where the EU Recovery Fund is yet to be ratified while the US and UK have both rolled out additional stimulus and plans more in the months ahead (US). However, recent activity data suggests the hit to the economy from the most recent lockdowns was not as bad as feared and data has surprised to the upside. Even though plenty of participants have positioned for a recovery in the EU, we think a lot of those positive expectations are already reflected in the price and think as the Dollar’s fate turns less negative the EUR might face an uphill battle to keep up with its recent appreciation.
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