- EUR/USD downtrend has resumed after a short post FOMC bounce
- US consumer confidence continues upswing on employment and income prospects
- Eurozone labour market conditions are slowly improving
EUR/USD downtrend resumes
After the FOMC meeting on 18 March, in which the Fed signalled slower rate hikes, the US dollar fell under heavy pressure and EUR/USD tried several times to move above 1.10. This was also driven by an improvement in sentiment towards the euro, because of stronger-than-expected eurozone economic data releases. Since the start of this week, sentiment towards the US dollar has improved again. There are several reasons for this.
Focus on US economic data
For starters, financial markets have realised that the long-term trend of US dollar strength and euro weakness has not changed and that the bounce higher in EUR/USD will likely be temporary. The failure of EUR/USD to stay above 1.10 strongly reflects this negative sentiment in EUR/USD, while data from the futures markets showed speculative investors continued to build short positions (see chart). In addition, investors hold a more positive stance on the US dollar ahead of crucial US economic data releases, such as today’s ISM manufacturing survey and Friday’s US employment report (both for March). The latter will be released in thin market conditions, because of public holidays in most of Europe. So large price swings after the release of this report are very likely.
Monetary policy chasm will drive EUR/USD lower
Looking ahead, we remain of the view that EUR/USD will move lower. The ECB’s aggressive QE programme will continue to push down eurozone yields and the euro despite improving macro data. Indeed, it remains our view that eurozone growth will surprise on the upside. In addition, strong US economic data will likely trigger a 25bp rate hike at the September Fed meeting. Furthermore, financial markets will adjust to factor in more Fed rate increases this year and next year. This is a major positive driver for the US dollar. Our EUR/USD forecast for the end of June and December are 1.0 and 0.95, respectively.
US consumer confidence improves
There were some early signs of stronger data from the US. After retreating in February, consumer confidence improved in March and now stands at 101.3 coming up from 96.4. The increase was driven by an improved outlook for employment and income prospects. Despite the weak data on consumer spending in the past few months, we think that consumer fundamentals remain solid. Indeed, the gain in consumer spending in the fourth quarter GDP data was the highest in eight years, while the fallback in the first months of this year can be partly explained by the cold weather.
Eurozone unemployment continues to edge lower
The eurozone’s unemployment rate fell from 11.4% in January to 11.3% in February. It has been slowly declining since June 2013 when it stood at 12.1%. This adds to evidence that labour market conditions in the eurozone are improving. Employment has been expanding modestly since the first quarter of 2014 and in 2014Q4 it reached 0.9% yoy. Given our expectations of accelerating GDP growth this year, we expect employment growth to pick up in the second half of this year. That said, there remain large difference in labour market conditions in the various member states. Compared to a year ago, the unemployment rate has dropped sharply in Spain, Greece and Portugal, although the levels have remained well above the eurozone average. In France and Italy, in contrast, unemployment was still higher than a year ago in February.