Oliver Mangan: Euro at 83p is trading at lowest since 2016
Range trading has been a dominant feature of foreign exchange markets for more than a year now, especially for nearly all the major currencies.
However, a number of developments have seen a breakout by some key currencies in the past week.
The euro has been confined to a narrow range of $1.09 to $1.15 since the autumn of 2018, but it breached the key $1.09 support level last week, falling to a three year low of $1.0830.
Meantime, the single currency has fallen to its lowest level against sterling since 2016, dropping to 83 pence.
There are a number of factors at work.
Economic data have been coming in well ahead of expectations in both the US and UK this year.
By contrast, eurozone figures have generally disappointed expectations and political uncertainty has gripped Germany recently, in contrast to the US and UK where the political landscape is more settled.
The outbreak of the coronavirus in China has also sparked a flight to safety into currencies like the dollar.
The two other main safe-haven currencies, the Swiss franc, and the yen, have also strengthened this year.
Some of these factors are intertwined: There are concerns that the disruption caused by the coronavirus will exacerbate the industrial slump in the eurozone, and weigh on the euro.
The car industry, in particular, is reliant on components from China, which is also an important market for European exports.
In the UK, following the Conservatives’ landslide election win, there are signs they will loosen fiscal policy to boost UK growth, which is supporting sterling.
The market continues to believe that rate cuts are probable in the US and UK this year, but monetary policy will be kept on hold in the eurozone.
The ECB continues to emphasise that it has the scope to do more policy loosening and is prepared to act if required.
This could include lowering rates even further into negative territory.
Something does not add up here.
If global economic conditions deteriorate so much this year that rate cuts are required in the US and UK, then the ECB will be following suit as an even looser policy stance will be required to help it achieve its inflation goal.
On the other hand, if recent signs of improving global growth prove sustained, then monetary policy can be expected to stay on hold everywhere.
Either way, it is hard to see the ECB being an outlier.
