Euro-Dollar Draws Confidence from ZEW Data and Ebbing USD

- EUR/USD eyes February highs
- USD declines, European FX outperforms
- Confidence in EZ & global recoveries rises

Image © Alfred Yaghobzadeh, European Commission Audiovisual Services.

• EUR/USD spot at publication: 1.2166
• Bank transfer rates (indicative guide): 1.1740-1.1826
• Money transfer specialist rates (indicative): 1.2080
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The Euro-to-Dollar exchange rate was an outperformer alongside a handful of other European currencies on Wednesday amid further declines by the Dollar and after the latest ZEW survey confirmed investors are increasingly confident in the Eurozone’s recovery prospects.

Europe’s single currency was higher against all of its major counterparts on Tuesday with the exception of the Swedish Krona, Polish Zloty and Norwegian Krone, in price action that gave the Euro-Dollar rate a clear path toward 1.22 and its highest since late February.

This is after improved economic prospects were recognised by increasing numbers of analysts in the May iteration of the survey by Zentrum fur Europäische Wirtschaftsforschung (ZEW), with confidence measures for both Europe and Germany rising strongly.

The index reflecting changes in expectations for the Eurozone over the next six-months rose by 17.7 points to 84.0, aided by a surge of optimism about German economic prospects, where the index measuring confidence in the outlook rose to its highest level since the year 2000.

“The leap in expectations suggests that markets now believe in the best of possible worlds; namely that the a strong, if short-lived, economic recovery is about to begin, driven by an impressive Q2 vaccine push, and that policymakers won’t let the foot off the gas as the above-average economic data roll in over the summer and in Q4,” says Claus Vistesen, chief Eurozone economist at Pantheon Macroeconomics.

Above: Euro-Dollar rate shown at daily intervals.

ZEW’s survey polls around 275 institutional investors asking them to rate relative conditions and the outlook for the German and Eurozone economies.

Tuesday’s barometer draws a line under the steep decline previously seen in April, which was widely attributed to a third wave of coronavirus infections that saw restrictions on activity tightened across a range of continental countries.

It also echoes the message of other surveys from IHS Markit suggesting that Europe’s manufacturing and services sectors were shocked back into life last month.

This is all at a point when the continent is beginning to close the gap between itself and the U.S. in terms of the vaccine rollout.

Above: EU-US vaccination trends. Source: Goldman Sachs Global Investment Research.

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“We now expect that the US and EU will reach the milestone of vaccinating 50% of the population around the same time (mid-June). That effectively closes what we had thought would be about a 6-week gap,” says Nikola Dacic, an economist at Goldman Sachs.

Meanwhile, the wider global economy is entering a sweet spot, supported by U.S. monetary policy that is keeping bond yields across the Atlantic and elsewhere in the world low and in the process, supporting investor risk appetite.

In addition and at the same time, Washington’s extraordinary government spending is helping to drive a recovery of activity that will effectively provide the rest of world economy with a shot in the arm at the same time.

The effect of this has been a widespread decline by the U.S. Dollar, which was very sharp in the wake of the April non-farm payrolls report last Friday but has since then become a more measured decline.

Above: U.S. Dollar exchange rate quotes and performances.

“Our latest proprietary flows are strongly negative for the USD. Last week real money did buy the USD, but after substantial selling the week before and ahead of what was a very weak NFP. Hedge funds continued selling the USD across the board. Official and corporate USD flows have also turned negative in recent weeks,” says Athanasios Vamvakidis, head of FX strategy at BofA Global Research.

The Dollar has fallen against all but the lowest yielding or simply poorly currencies in recent days, with exchange rates like USD/JPY and USD/CHF having edged higher even as the Euro-Dollar rate and other European currencies advanced.

The Dollar decline has lifted EUR/USD, GBP/USD and a range of other European currencies in recent days although the rising confidence in the continent’s own economic outlook that was embodied by Tuesday's ZEW survey implies scope for a homegrown rally by the single currency later this year, which is a popular idea with one large slice of the market currently.

“The re-opening/vaccine path combined with European data surprises to the upside suggest further EUR strength from here, not weakness,” says Jordan Rochester, a strategist at Nomura.

“We remain long GBP/USD, as a high beta expression of the EUR/USD view.”