the macro environment is supporting the USD right now
at the moment, no macro factor is currently influencing the EURUSD the way it is supposed to, showing that the exchange rate is moving for different reasons connected to sentiment and politics
Insights from the PMI differential:
US and EU prospective growth are expected to be identical in the upcoming months, a factor that should not influence the exchange rate. Also, mixed PMI differentials in the past couple of months are not proving decisive to influence the EURUSD in any specific direction.
with a stronger USD observed in the past 3 months instead, we can see that PMI differentials have not influenced the exchange rate over such period.
Insights from monetary policy divergence:
US spot rates are marginally higher than the ones in Europe, a factor that should be mildly supportive of the USD. Also, US rates are currently moving lower, removing support to the US.
the weak correlation between the interest rates differential and the exchange rate shows no clear relationship over the past few months
Insights from yield differential:
US 10yr Treasury yields are higher than the German Bund ones, a factor that should support the USD. Also, lately US Treasury yields have moved higher, increasing the overall divergence vs German government bonds.
the weak correlation between the yield differential and the exchange rate shows no clear relationship over the past few months
IntroThere are three key macroeconomic drivers of the EURUSD, tipically (but not always) influencing the direction of the exchange rate over time, and we show them on the right. A summary of their divergences is presented in the chart above here.
Chart guide: detailsOn the right side of the page we look at three charts:
(1) chart on the top - we look at the differential between US and EU PMIs (purchasing manager index), which measures the different speed (in PMI points) of the future expected growth in the US vs EU;
(2) chart in the middle - we look at the divergence between the current level of spot interest rates in the US vs EU, (measured with the AMERIBOR less the EURIBOR);
(3) chart at the bottom - we look at the differential between the current US Treasury 10yr yield less the German 10yr yield;
Economic implicationsEvery single chart (or differential) monitored on the right simply looks at the existing incentives that are offered to investors to decide if to invest in the US or Europe: the PMI differential chart shows where expected economic growth should be moving up faster, white the current interest rate spreads monitors where cash is best remunerated right now, and finally the bond yield differential indicates where higher bond yields are available.
Rational investors are believed to allocate their savings in the location of faster expected growth (on better equity earnings to come), better cash and bond income remuneration. The subsequent capital flow should support one or the other currency.
If the observed differentials indicate more attractive opportunities in the US, investors tipically make the logical choice of moving capital flows to the US, pushing the USD higher; conversely, if differentials prize Europe, capital flows into Europe will reward the EUR.
Market implicationsThese macroeconomic drivers tend to create a powerful inventive for capital flows and thus they tend to provide a comprehensive summary of the key drivers influencing the EURUSD rate. But sometimes events, pure investor sentiment, politics or geopolitics take the driving seat. And so the EURUSD take unpredictable directions.
This page offers a disciplined take at monitoring how the EURUSD should behave, given some key incentives in place right now. And if the exchange rate does not follow the existing incentives, then we know that a specific sentiment-related driven is preponderant (look at the EUR vs USD momentum page to capture the trend).