Unconvinced by EUR weakness

The EUR has taken a bit of a hiding in the last few days, but I’m not convinced this makes a lot of sense. Sure, the German CPI data was a little weaker than expected, but Eurozone CPI is in line and basically unchanged on a core basis for some time. Headline will rise on base effects in the coming months. I don’t think there’s a reason to expect imminent further ECB easing on the basis of the data we have had.

The real side of the economy still seems to be holding up reasonably well. Though China and the oil based emerging markets are slowing, and this is clearly going to hold back Eurozone export growth, Europe’s domestic demand continues to be well supported by the real consumption boost provided by the lower oil price. The Eurozone PMI data has been solid while the US numbers have been weak. There is more reason to doubt the prospects for two US rate hikes this year than to start looking for further ECB easing. In a risk negative market I struggle to understand how this translates into USD strength when the data suggests there are still plenty of long USD positions out there.

Nevertheless, you have to respect the price action so I wouldn’t jump in too quickly, but I see levels near 1.07 as good value for EUR/USD.

 

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