FX Market View #33 Euro slides as European Nations battle a COVID surge

The momentum behind the Euro rally last week ran out of steam, as COVID infection numbers surge on the continent. Europe’s central and eastern currencies were also weighed down with little sign of a reprieve. As Europe looks to become the new epicentre for the next wave of the pandemic, markets are responding to the negative side. Austria and the Netherlands have reintroduced lock-down measure, with German politicians warning that vaccines alone will not stem the surge in COVID cases. When facing global market tensions, the Dollar typically strengthens along with the Yen. This week Euro and other European market currencies will likely struggle to reverse their weakening position. The Dollar and Swiss Franc are now holding multi-year highs against the Euro.
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If the primary concern for stagnating global growth is the re-emergence of the pandemic, elevated inflation levels holds second place. Monthly reports on manufacturing activity would normally be the focus of the week as markets look to gauge growth prospects. The US, China and Japan will likely see increases in economic growth rates during the last quarter of the year. Europe and the UK hold the unwanted position of regions that will experience a fall in economic output. The market is very sensitive to inflation data, responding to the downside when major central banks report this unfavourable news. This week the central banks from three high-income countries will meet; Israel, New Zealand and Sweden. Of the three, only the RBN will likely set another near-term rate hike.
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Strong consumption and production numbers released in the US contributed in the Dollar keeping its shore footing against the majors. Combined with the fact that Europe appears to be struggling with a new wave of COVID cases, the divergence between the greenback and common currency is even greater. As a consequence, the markets did not put up much resistance when the Euro dropped to new lows of the year against the Dollar. The Norwegian Krone was one of the largest decliners of the week when comparing the currency majors. The rate of decline appeared to match a similar trajectory suffered by the price of oil, which has been on a downward trend for the past month. However, a potential rate hike next month by Norges Bank could see the pattern reversed.

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