Monthly Wrap – EUR – Euro mixed in choppy new-year trade

By Philip McHugh on January 19, 2022

Key takeaways:

–              Euro caught up in US dollar volatility
–              Mixed Eurozone data adds to fluctuations in EUR
–              EUR monthly lows: £0.83, $1.12, AU$1.56, NZ$1.65, C$1.41
–              EUR monthly highs: £0.85, $1.15, AU$1.59, NZ$1.68, C$1.46

The euro had mixed success in late December, as a Santa rally in global markets triggered some risk-on trade. On the one hand, this dampened the appeal of the safe-haven euro. On the other, the subsequent weakness in the US dollar boosted EUR due to the currencies’ negative correlation.

EUR then wavered through the first week of January as policy divergence between the European Central Bank (ECB) and both the Bank of England (BoE) and the Federal Reserve continued to act as a headwind.

However, upbeat economic data offset the downside. Many of the reports out of Germany and the euro area beat forecasts, including the Eurozone’s flash CPI for December, which unexpectedly rose.

The single currency initially had more success in the second week of the year. The US dollar retreated after commentary from Fed Chair Jerome Powell and the US CPI disappointed investors, which in turn supported the euro.

Things began to turn, however. German GDP data confirmed that the country’s economy remained below pre-pandemic levels and the Eurozone reported its first trade deficit since January 2014.

EUR then edged lower as a strengthening US dollar reapplied some pressure. And with the Fed and BoE rate decisions looming, central bank policy divergence once again weighed on EUR.

Looking ahead, the Markit PMIs for January are forecast to show an improvement, which could support EUR.

Germany’s and the Eurozone’s GDP growth rate data for the fourth quarter are also due out. The single currency might take a hit as economists expect German GDP to have contracted.

Additionally, there is the flash January CPI for the euro area. The ECB expects price pressures to ease, but a higher-then-expected reading might have markets hoping for a more hawkish approach from the central bank.

Speaking of central banks, we have the Fed and BoE rate decisions over the next two weeks. With more aggressive action expected, policy divergence might push EUR lower.