Pantheon Macroeconomics - Where will EURUSD go in Q2? How about nowhere

News | Question of the Week, WC 4th May 2020
Where will EURUSD go in Q2? How about nowhere

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Question of the Week, WC 4th May 2020

Q. Where will EURUSD go in Q2? How about nowhere

Analysts were alarmed earlier this week when the U.S. Treasury announced that it is planning to issue as much as $4T through Q2, to cover the costs of mopping up after the Covid-19 crisis, or at least after the initial flurry of stimulus. The argument goes that the increase in debt issuance, alongside the rapid Fed balance sheet expansion, is going to crush the dollar. That was funny to us. More specifically, we’d like to know what those analysts are assuming in terms of fiscal stimulus in the Eurozone, and how that factors in to the call on a weaker dollar, which, necessarily, means a stronger euro. 

In any case, our first chart below shows that the big relative macroeconomic aggregates have been a poor guide to the direction of EURUSD since 2015,  which, interestingly, coincides almost perfectly with the advent of negative rates and QE at the ECB. If the Fed really wanted a weaker dollar, or if Mr. Trump wanted to tell the Fed what to do—he has a knack for that—maybe negative rates should be the suggestion?

Elsewhere, our final three charts show that cyclical indicators for EURUSD currently are mixed. The first shows that the relative momentum in the OECD’s leading indicators favour a stronger dollar, via a decline in EURUSD towards parity over the next few months. The second chart shows that the relative trend in measured political uncertainty points to the opposite outcome. And finally, the spread between the two economies’ core inflation rates suggest that EURUSD will stay where it is over the next four months, more-or-less that is. 

We are loath to stick our neck out on currencies, even in the best of times, and at this point, our indicators don’t allow us to take a decisive view either way. So, from a Eurozone perspective, our call is that EURUSD probably won’t do that much through Q2.  

Claus Vistesen

Chief Eurozone Economist

Posted: 7th May 2020

Consistently Right

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