Sharp economic slowdown weighing on euro trades

The sharp and somewhat sudden economic slowdown in Europe is weighing on the euro making it difficult for traders to meaningfully propel the currency upward, according to a leading City analyst.

Kit Juckes, Head of FX at Société Générale, says the market’s most frequently asked question these days is whether the ongoing sharp slowdown in European growth is temporary. “We've faced them since the start of the year. Some temporary factors weighing on growth should fade away, for instance, the side-effects of diesel-gate. 

“And one day, uncertainty on global trade and Brexit will fade too, but there is gloom around and 10-year Bund yields are back at 21bp. That's nowhere near high enough to propel the euro upwards, out of its current range, let alone to the sunlit uplands above EUR/USD 1.20.”

Juckes added that if the US economy wasn't slowing, EUR/USD would already be on the "other side" of 1.10. 

“If for no other reason, we have a bias to be short euros against a trio of other currencies - EUR/JPY as the yen finds its feet and markets remain uncertain, EUR/AUD as lower US yields put some support under AUD/USD, and for now, EUR/GBP as hope of a softer Brexit scares GBP shorts.”

As for EUR/USD itself, it's back in the 1.13-1.15 range of recent weeks and needs to find a base close to current levels to restore confidence, with little news around to bring that about. 

Switching tack to Brexit, Juckes said when the UK voted for Brexit in 2016, markets priced it in (to a large degree) and now are watching, slack-jawed, as the British Government tries to find a path to the exit which it can rally politicians behind. 

“Hopes that a no-deal Brexit will be avoided remain pretty high and EUR/GBP can edge jaggedly lower.”