EUR/USD tanks to lowest in 19 months

The US dollar has outperformed this week sending the euro to its lowest since June 2020. European indices are set for a mixed start ahead of German GDP and US inflation data.

• A hawkish Fed and strong GDP data boosted the USD to its highest level since Spring ’20 -inflation data due.
• The FTSE is set for weekly gains despite a rollercoaster week on Wall Street.
• German economic growth is expected to weaken in Q4

European bourses are heading for a mixed start, with some signs of resilience after a roller-coaster week in the US. Yesterday saw the main indices on Wall Street perform another spectacular U-turn to finish the session once again in the red.

The FTSE has fared better than both its European and US counterparts. Thanks to heavy-weighted oil stocks and its lack of tech stocks, the FTSE is one of the few global indices heading for a weekly gain. Meanwhile stateside, the tech-heavy Nasdaq is on track to lose over 3% this week, and trades down 14.6% so far this year, as investors rotate out of high growth stocks on the back of rising interest rate expectations.

It’s fair to say this week has been pivotal for the markets and their assessment of the US economy and the direction of the Fed. 

USD hits 19-month high

Perhaps unsurprisingly the USD has outperformed this week. A hawkish Fed, in addition to data revealing that the US economy grew at the fastest pace since 1984, in the final three months of last year, propelled the US Dollar index to its highest level since June 2020. Given that the euro is the heaviest component of the dollar index, EUR/USD made a mirror move down to 19-month lows. The same factors, in addition to USD strength, have sent gold tumbling over $50 per troy ounce lower this week sub $1800. 

A strong buck and falling gold prices don’t bode well for AUD/USD. The pair trades over 2% lower across the week and technical analysts are pointing to a possible head and shoulders top.

US Core PCE due

The US Core PCE index is due later and is expected to be supportive of the hawkish Fed, showing that inflation rose again in December, hitting 4.8%. So far, the US consumer is showing limited signs of being negatively impacted by the rising cost of living. Personal spending has been strong in recent months, although this is expected to slow in December by -0.6. However, the decline in personal spending is probably due to the rapid spread of Omicron, rather than consumer distress from rising prices.

German GDP

Prior to US inflation data, GDP data from Germany will be in focus. Economic growth in the Eurozone’s largest economy is expected to have slowed in Q4 to 1.8% quarter on quarter, down from 2.5% due to firstly Delta and then Omicron spreading across the country. Rising energy prices, coupled with 3-decade high inflation could also be hampering economic growth.

EUR/USD to 1.10?

If the euro is looking for a boost from the 19-month low against the USD, German GDP numbers may not be the answer. Indeed, EURUSD could struggle to gain much ground going forwards given the growing central bank divergence. Whilst the market is preparing for the Fed to hike up to 5 times this year, the ECB is not planning any hikes for 2022. EURUSD remains depressed having broken below the November low, at this point a target of 1.10 doesn’t seem unreasonable – perhaps depending on the ECB meeting next week.