The euro’s six-week winning streak has come to an end
Euro fundamentals: bullish
It’s been a very interesting week for the euro. At one point EUR/USD was down as much as 2 percent. Had those losses continued, it would have been the single currency’s worst week since mid-September. But the euro staged a comeback against the US dollar on Friday, paring its losses to just about 0.5 percent this week. It also ended the six-week winning streak, the longest since July 2020.
As concluded last week, we received two critical economic data releases from the United States.
The first was the December non-farm payrolls report. The nation added 223,000 jobs versus 203,000 expected. This was also not far from an estimate I made using the predictive nature of ADP employment data. But markets have been more focused on the missing average hourly wages. That was 4.6% year-on-year versus 5.0% year-on-year.
A few hours later, ISM Services crossed the wires and it spelled trouble for the economy. The index traded at 49.6 versus the consensus of 55.0. Values below 50 indicate increasingly contracting economic activity and vice versa. The 12.2% drop from 56.5 to 49.6 was the worst since the global pandemic began in 2020.
Such a shock was quickly acknowledged by traders. In the chart below, we can see that markets have been quick to reprice the Federal Reserve’s expected longer-term stance. We’ve lost almost 50 basis points in interest rates in three years. This is also reflected in the 10-year government bond yield, which has suffered its largest weekly decline since February 2022.
With this in mind, all eyes will now be on next week’s US Inflation Report from December. On Thursday, the CPI falls to 6.5% yoy from 7.1% in November. Core strength moderates to 5.7% yoy from 6.0% previously. NFPs’ disappointing average hourly earnings are likely leading traders to expect a similarly weak inflation outcome. But doesn’t that bode ill for the US dollar?
This is certainly a strong possibility at first, opening the door to capitalization for the euro. What traders need to understand, however, is that when the US economy falters, especially when it happens suddenly, risk aversion tends to kick in, and that means traders typically park their capital in the greenback.
So, depending on how economic conditions unfold over the coming weeks and months, keep in mind that short-term euro gains risk being offset later. But for now, markets may remain focused on the prospects of a less hawkish Fed as data worsens. This could strengthen the euro in the short term.