While fundamentals favor buying the Euro on dips, a strong U.S. payrolls report is unlikely to cause a major sell-off. The speaker is more concerned about a potential geopolitical escalation involving Russia, which could trigger a much larger, 3-5 cent decline in the currency pair.
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Contrary to typical risk-off behavior, a financial shock originating in the US would likely be positive for the EUR/USD exchange rate. This is because it creates more room for the US Federal Reserve to reprice its policy downwards and can trigger repatriation flows out of US equities.
Analysts expect a continued dollar-centric market where most G10 currencies move in tandem against the dollar, keeping dollar correlations high. However, they are bearish on cross-correlations (e.g., involving Sterling and Euro), anticipating greater divergence between non-dollar currencies, which presents an opportunity for investors.
With both US and European economies growing robustly, the direct EUR/USD currency pair is largely neutralized. A more effective strategy to gain exposure to Europe's strengthening growth is by investing in higher-beta, pro-cyclical currencies like the Scandinavian Kroner, which are less impacted by broad US dollar movements.
Contrary to the belief that US strength harms the Euro, historical data shows the EUR/USD pair performs best when growth outlooks for *both* regions are being upgraded. This is because the Euro is fundamentally a pro-cyclical 'growth currency,' benefiting from a global risk-on environment even when the US also thrives.
The bullish case for the Euro is weakening as growth signals outside the U.S. lose intensity. Critically, all of J.P. Morgan's developed market economic activity surprise indices have now fallen into negative territory, posing a significant challenge to the Euro's cyclical strength against the dollar.
Despite negative political headlines, the Euro/Dollar spot rate has fallen below its fair value of 1.17, as determined by real yield differentials. This marks a significant shift, suggesting the risk/reward is once again becoming attractive for medium-term bulls on the currency.
While the idea of US growth re-acceleration is driving dollar strength, it's not the only story. Recent positive surprises in European PMI data and upgraded Chinese GDP forecasts suggest broader global growth resilience. This breadth should help cap the US dollar's rally and may promote weakness against other currencies.
Despite a packed calendar of central bank decisions and key data releases, broad FX volatility is hovering near five-year lows. This suggests investors are underpricing potential market moves, and current options pricing for events like U.S. payrolls may be insufficient to cover a significant data surprise.
While mass firings of federal workers may not significantly alter overall payroll statistics, their real impact is a potential shock to consumer and business confidence. This second-order effect on sentiment is a key underappreciated risk that the market has not fully priced into the US dollar.
The absence of key data releases like non-farm payrolls during a government shutdown reduces market-moving catalysts. This artificially lowers volatility, creating a stable environment conducive to running carry trades and maintaining existing positions like dollar shorts, contrary to expectations of increased uncertainty.