Demand for the Euro was generally weakening over the previous week, resulting in a 1% depreciation of the currency during the first four days. However, risk-off sentiment was reversed on Friday, when the EUR has managed to offset prior losses.
Last Monday the Euro lost 0.52% amid contracting Spanish GDP and growing Italian debt yields, though volatility remained decreased against the backdrop of turbulence observed previously.
The following day the EUR rallied (+0.31%) despite declining German retail sales and stagnating at an elevated level unemployment rate in Eurozone.
Beginning of a new month was marked by the statement of the FOMC, which appeared to be less dovish than expected, leading to ubiquitous appreciation of the greenback +0.54%). Accordingly, the Euro fell in value by 0.32%.
August 2 was the most volatile day, as DBVI surged up to a mark of 3.0, while EUR/USD volatility index soared to the level of 4.3, being that the ECB refrained from lowering the key interest rate and Mario Draghi failed to deliver measures awaited by the market, thus knocking down currency of the Euro by 0.77% within three hours.
Subsequent bullish behaviour of the Euro (+1%) took markets by surprise, as no news released on Friday had presumably potential to impact exchange rates to such extent. Among the positive data released on August 3 were U.S. non-farm employment change and ISM non-manufacturing PMI, significance of which seems to be a bit exaggerated.
Until August 2 the average correlation coefficient stayed depressed around a level of 0.4, implying weak influence of the Euro on the foreign exchange markets. Currency’s significance, however, was considerably changed with the ECB’s press conference, as the average correlation jumped up to 0.6 and remains heightened. Accordingly, we may expect greater and more univocal extent to which Eurozone economic data impacts crosses of the Euro.
Performance of the constituents of the average correlation coefficient reveals frequent co-movement of EUR/USD, EUR/JPY and EUR/GBP currency pairs, meaning increased risk provided exposure to two or all three pairs. Correlations EUR/JPY & EUR/CHF and EUR/USD & EUR/CHF, on the other hand, are considerably weaker and seem to gravitate towards 0 and provide a better opportunity to diversify risk.