What's driving the EUR|USD
Macro Drivers
Insights | FX drivers
CONCEPT
The EUR/USD exchange rate is the ultimate scoreboard of relative economic gravity between the US and the Eurozone. To help investors spot which economy scores more points to attract capital, Cartesio tracks the three pillars of currency dominance: interest rate policy divergence, long-term yield differentials, and forward-looking economic growth gaps.
CURRENT READINGS
- Interest Rates divergence is at 1.71% - US spot rates are marginally higher than the ones in Europe, a factor that should be mildly supportive of the USD.
- The Yield differential is at 1.55% - US 10yr Treasury yields are higher than the German Bund ones, a factor that should support the USD.
- The PMI growth differential is at 3.00% - US prospective growth is expected to be much faster than European growth in the upcoming months, a factor that should be clearly supportive of the USD.
MARKET IMPLICATIONS
- The gravitational pull from the observed key macro drivers - some offering higher yields to capital flows and some to offer faster growth opportunities - should be supporting the USD.
PMI and yield differentials show a meaningful correlation with, and thus degree of influence on, the EURUSD exchange rate
Influence | Stocks & FX
Insights | EQTY correlations
CONCEPT
The relationship between equities and the EURUSD is a reciprocal loop driven by: (1) sentiment & economic growth lifting stock prices, attracting foreign capital and driving currency demand; (2) interest rate shifts that move the currency first, then dictates the attractiveness of regional equity markets.
CURRENT READINGS
Over the selected period, the USD turned stronger vs EUR and the Stoxx 600 index has been rising. Their 3-Month correlation is 0.05.
MARKET IMPLICATIONS
It means that the relationship between the EUR/USD and the stock market is currently weak, suggesting they are moving independently.
There are two opposite angles to evaluate FX drivers. Fundamental analysis would focus on currencies and trade. A weaker EUR would foster exports, support EU earnings and attract international capital in European stocks. A stronger EUR would slow-down European export-heavy stock prices instead.
Momentum analysis would instead focus on sentiment. Positive sentiment towards the EU - due to rates outlook, inflation, growth or whatever reason - would invite flows into European stocks, subsequently pushing up the EUR as a consequence.