Euro Hits New One-year Best against Dollar

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The Euro to Dollar exchange rate (EUR/USD) spiked to hit 1.1095 in midweek trade meaning dollar buyers holding euros were looking at their best exchange rate in over a year.

EUR/USD rose by more than a per cent amidst a more settled global investor sentiment with the previous day's concerns over the U.S. banking sector rapidly fading.

"A cautious calm returned to markets," says Joe Manimbo, Senior Currency Analyst at Convera. "The euro and sterling climbed back into positive territory for the week, with the former back within striking distance of recent one-year peaks."

The Euro has pulled back somewhat by the time of writing on Thursday, but the uptrend remains intact.

"The euro profited from the ECB’s unabated hawkish stance and subsiding energy concerns. The nearing end of the Fed cycle combined with local financial stability concerns meanwhile weighted on the dollar. This divergence triggered a relative loss of interest rates support for the dollar and pushed EUR/USD to a new YTD top. Next resistance kicks in at 1.1274," says Mathias Van der Jeugt, an analyst at KBC Bank.

Image courtesy of KBC Bank.

The Dollar climbed against the Pound, Euro and other major currencies on Tuesday amidst a broad pullback in global equities as investors reacted to fresh concerns about the U.S. banking sector.

The mid-tier lender First Republic Bank said it suffered $100BN in deposit outflows during the first quarter as banking sector fears grew following the collapse of Silicon Valley Bank and Signature Bank.

But First Republic Bank still stands and there are no signs of stress elsewhere in the sector, meaning fears are being pared at the time of writing Wednesday.

The Dollar was softer as investors reacted to U.S. data that showed further signs of a slowdown: the durable goods report showed demand for nondefense capital goods fell by 0.4% in March, after a downwardly-revised 0.7% drop in February.

"We think bigger falls in orders are coming over the next few months as credit conditions continue to tighten," says Kieran Clancy, Senior U.S. Economist at Pantheon Macroeconomics.

The prospect of a U.S. recession in the second half of the year is growing and with it the prospect of rate cuts at the U.S. Federal Reserve, all of which combines to undermine the Dollar.

The Euro continues to outperform as investors predict the European Central Bank (ECB) still has some way to go in raising interest rates further.

The single currency is gaining on those currencies belonging to central banks that have either paused (AUD, CAD) or are about to pause (USD).

Gains are less impressive against those central banks that are yet to raise rates further, but be less than the ECB (GBP).

"The fact CHF and EUR lead the pack instead suggests that old-school central bank relative hawkishness concerns are the real drivers within the G10 space," says Shahab Jalinoos, head of FX research and strategy at Credit Suisse.

Credit Suisse targets EUR/USD at 1.1250 by the end of the second quarter, "but predict a slow grind to that level given positioning and only a lukewarm rates divergence story at this stage."

"For the USD, the downtrend since the start of March remains in place, but it has become a grind lower rather than a meaningful drop," says Daragh Maher, Head of Research for the Americas at HSBC.

"The EUR continues to capitalise on the possibility, however slim, of
a 50bp hike next week at the ECB," he adds.

The near-term risk to the Euro-Dollar uptrend is indeed next week's ECB meeting and anything less than a 50bp hike could undermine the Euro.

The market is fully invested in ECB hawkishness, therefore any hints that it is ready to ease back on this stance could cause a rapid repricing in expectations that could deflate the Euro's sails.

But Eurozone data would need to take a material turn for the worse before such an outcome is realised, particularly as the economy continues to surprise: most recently April consumer confidence data for Germany and France both came in higher than expected.

Inflation is well ahead of the ECB's 2.0% target and is unlikely to turn materially lower until wage price growth begins to cool.

May could therefore be too soon for the ECB to undermine the Euro's trend of appreciation.