EUR/USD is Now a Buy says Societe Generale

Modified: Monday, 29 April 2019 18:07 BST
Written by: James Skinner

- Buy EUR/USD ahead of likely GDP surprise says Soc Gen.

- Just as Nordea Markets walks away from earlier EUR long.

- Rabobank warns that EUR has scope to slide all way to 1.08.

The Euro is a buy ahead of the publication of first-quarter GDP data, according to analysts at Societe Generale, who're telling clients that pessimism about the single currency outlook has gone far enough just as colleagues elsewhere in the industry are abandoning earlier bets on the Euro-to-Dollar rate.

Eurozone GDP data for the first quarter will be released at 10:00 am London time on Tuesday and markets are looking for a poor final quarter of 2018 to be followed by a modest pickup at the beginning of the 2019 year.

Consensus is for the Eurozone economy to have grown by 0.3% during the period, up from the 0.2% pace of growth seen in the final three months of the year. Such an outcome would place Eurozone growth on a gentle upward path from the 0.1% increase seen in the third quarter last year.

"The PMI data did their trick and then the IFO data triggered a tumble out of the bottom of the EUR/USD range," says Kit Juckes, chief FX strategist at Societe Generale. "Tomorrow sees the first estimate of Q1 Eurozone GDP. Our forecast of 0.5% q/q is well above a 0.3% consensus. That is enough for our first ‘go long EUR/USD' suggestion of 2019."

Above: Euro-to-Dollar rate shown at 4-hour intervals.

Juckes has advocated that Societe Generale clients buy the Euro and set a stop-loss at 1.1090, which is not far beneath last week's low of around 1.1120, in order to take advantage of an anticipated reappraisal of the relative transatlantic economic growth outlook.

U.S. GDP data for the first quarter was far stronger than many economists had dared to imagine although the Dollar had been bid higher for the entire month leading up to the release, prompting a period of profit-taking once the figures were out on Friday.

After having broken below the floor of a narrow seven-month range last week, the Euro could now require a dose of positive economic news if it is to avoid further losses during the days and weeks ahead. Analysts opinions on the outlook for the currency are mixed though.

"EUR/USD has stopped tracking relative rates or yields, nominal or real, short or long and instead, is tracking growth expectations. 2017 saw a big improvement in growth expectations that convinced the ECB to pre-announce policy normalisation. In part because the euro rose sharply (particularly in trade weighted terms), the last year and a bit have seen a huge downgrade in growth expectations that has dragged the currency with it. That growth rethink has gone far enough, perhaps too far," Juckes says.

Changes in relative interest rates and the movements in relative bond yields produced by them are the foremost driver of currency exchange rates because capital flows tend to move in the direction where relative returns are most favourable and still improving.

However, financial markets are currently focused on differences in economic growth rates because of what the various economic numbers might mean for interest rate policies around the world and thereby, that gap between interest rates and bond yields further down the line.

Consensus still suggests the U.S. economy will slow sharply in 2019, ending the Federal Reserve rate hiking cycle in the process, and that a pick-up in growth across other parts of the world will put interest rate rises back on the table in Europe and elsewhere.

But so far the 2019 year has not panned out quite as the market anticipated, although Juckes clearly sees scope for this week's data to mark an inflection point in the 2019 story. Others have already tried that trade this year and are now giving up on the idea.

"We had hoped the 1.1187 level in EURUSD would hold, and that some green shoots would soon start to show up also in Euro-area data. Instead, the USD has been resurgent, causing plenty of technical damage both in EURUSD and the broader DXY index. We are hence stopped out of our EUR/USD short @ 1.1187 (and close our USD basket," says Andreas Steno Larsen, a strategist at Nordea Markets.

Above: Euro-to-Dollar rate shown at daily intervals.

Juckes is targeting a move up to the 1.16 level with his trade idea, although Larsen and the Nordea team took a very similar bet in the middle of April, entering a long position around 1.13 and aiming for a move up to 1.1650, although their stop-loss was hit last week.

"Instead of signs that the rest of the world will gradually be picking up vs the US, growth-wise, economists are if anything now hiking US growth forecasts for 2019 while other growth forecasts are flat or being lowered (especially for the Euro-area). The better-than-expected US Q1 GDP figure underpins this idea for now," Larsen explained Monday. "Trump threatened tariffs against EU this week. This could stomp out any green shoots in Europe and may be one reason causing PMIs and IFO to remain more depressed than we have expected, though timing is extremely uncertain."

The Eurozone economy has been weakening ever since early 2018 although the the third quarter marked a step-change in the deceleration, with growth then reaching levels of 0.1% and 0.2% that are typically associated with economic stagnation and recession risks.

Damage done to the Chinese economy by President Donald Trump's trade war hurt the German economy last year and so too did one-off factors impacting the car manufacturing industry.

Economists have since flagged the Brexit process and prospect of a U.S. tariff fight with the EU as the latest to weigh on sentiment among companies and growth prospects across the bloc.

President Trump has repeatedly threatened to impose tariffs on EU car exports to the U.S. if the European Commission does not satisfy a range of objections the White House has in relation to EU trade policy.

"The break lower in EUR/USD has breached key supports in the 1.1184 and 1.1177 areas which, from a technical perspective, puts in view a potential move towards the 1.09/1.08 area. While we hold a bearish view for EUR/USD, fundamentals suggest that this target could prove a little too ambitious in the absence of further bad news for the Eurozone," says Piotr Matys, a technical strategist at Rabobank.

Above: Euro-to-Dollar rate shown at weekly intervals.

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