The EUR had a poor day on Monday, slumping to the bottom of the one-day performance table despite further upbeat survey indicators. Yesterday, also, it shrugged off a very solid set of German industrial numbers as markets continue to fret about the political situation in Germany. EUR/USD slipped to a 2018 low of USD1.1919; its lowest since December 28th and has only recovered around 10 pips of its losses in the overnight session in Asia.
Aside from the political concerns which we’ve been flagging up over the past few days, the interest rate differential between core European bonds and their US equivalents is now beginning to weigh on the Single European Currency. As mentioned above, 10-year US Treasuries hit a 10-month high of 2.54% yesterday but their German equivalents were up only 2.5bp to 0.45%. For sure this is still well above the December lows of 0.30% but the differential with the United States is back over 200bp at the 10-year maturity.
For the moment, annual CPI inflation in the euro zone remains stubbornly low at 1.4%, or just 1.1% when volatile food and energy prices are stripped out. This is well below the ECB’s target of an inflation rate of close to but just under 2 percent. Though ECB Council member Ewald Nowotny said in an interview published on January 2nd that QE could end in 2018 if the euro zone economy continues to grow strongly and on Sunday, the Bundesbank’s Jens Weidmann said the ECB should set a date to end QE, the market is still not fully pricing a rate hike until early 2019. Strong economic data are certainly helping the EUR but the yield differential is now creating quite a headwind for the exchange rate against the US Dollar.
The EUR opens in Europe this morning at USD1.1930 and GBP/EUR1.1335.