EUR: Developments suggest it could continue to underperform in the near-term – MUFG

The positive correlation between EUR/USD and equities has broken down, point out analysts at MUFG Bank. They add that the recent EUR underperformance could also reflect building pessimism over euro area growth outlook given slow vaccine roll out. The outlook for the euro has deteriorated in near-term but building pessimism could prove to be overdone, according to them. 

Key Quotes:

“There has been a notable change in way that the EUR has traded at the start of this year especially against the USD. The positive correlation between global equity market performance and EUR/USD has broken down.”

“The EUR’s recent failure to continue to strengthen on the back of the ongoing improvement in global investor risk sentiment could suggest/encourage more use of the EUR as a funding currency, and/or reflect more concern amongst market participants that the euro area will not benefit as much from global recovery
optimism.”

“The slow initial roll out of vaccines in EU has played a role in dampening expectations for stronger growth in the euro-zone although those fears could be overplayed in the near-term if warmer weather still allows economies to re-open like last year.”

“Another potential positive for the EUR recently has been the formation of the Draghiled coalition government in Italy. It has helped to further reduce downside tail risks for the EUR from political instability in Italy in the year ahead.”

“The developments suggest that the EUR could continue to underperform in the nearterm alongside other low yielding currencies, but there is upside potential for the EUR if relative pessimism over the euro area growth outlook proves overdone.”