The euro started this week relatively positive as it looked to sweep its losses against the US dollar under the carpet. The week before, the US dollar made gains against the European currency amidst tensions in the Middle East. The US economic figures published this week have been poor, leading to the euro strengthening against it. Meanwhile in the UK, the euro is also gaining against the pound, as the UK’s poor inflation rates weakened it, leading to rumours of interest rate cuts.
Euro pushed to make gains against dollar
The euro had a rocky start to 2019, but did turn a corner last August. The markets had expected and priced-in the European Central Bank (ECB) stimulus package, and expected a “no deal” Brexit (one of many) to hit in October. Shortly after that, the likelihood of “no deal” fell, and it became more apparent that once the UK’s General Election was over, there would be a higher probability of a smooth Brexit.
Moreover, it was also around August last year when US President Donald Trump toned down his trade war with China. On Wednesday, both the United States and China effectively signed a ceasefire.
The euro is proving particularly stubborn in 2020. The single currency wasn’t inspired by the IHS Markit PMI statistics, which hinted at a bit of a rebound for European manufacturing in December. The same is said for the official reports of a rebound in November in German industrial production. Neither of these welcome stories were enough to give the euro some momentum against the pound nor the dollar.
In December, the European Central Bank said it would be conducting a “strategic review” of responses to challenges faced by the single currency.
What next for the euro?
Many claim that the euro is a “funding currency”. This is because of the ECB’s interest rate policy for borrowing being in the negative- it’s really cheap if you want to borrow money. This low price sees the euro being borrowed and sold, so investors can keep the proceeds in higher yields, normally in the more emerging markets. All this means that there is pressure for the euro to make gains against its sterling and dollar rivals.
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