5 Reasons Why The Euro Broke 1.20

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Against all odds, the euro climbed to its strongest level versus the US dollar in more than two years. Not only was the single currency the day’s best performer but it surged well above 1.20, rising to its highest level since May 2018. For many, the persistence of the euro’s rally has been perplexing as there was only one down day in the last six. However, we don’t need to dig deep to find drivers for the move:

#1 US Dollar Weakness

There’s no coincidence that the euro’s rally coincides with broad-based US dollar weakness. The Dollar Index may be up today, but it is still trading near 2.5-year lows. Concerns about a spike in coronavirus cases after Thanksgiving and Federal Reserve Chairman Powell’s promise to keep interest rates low until there are actual signs of inflation gives investors very little reason to buy dollars. We saw that clearly today as the greenback extended its slide against most of major currencies despite the whopping 11% rise in 10 year Treasury yields.

#2 Stronger Eurozone Data

Stronger than expected data also lent support to the euro. Germany reported a surprise drop in unemployment rolls that helped ease the unemployment rate. Manufacturing PMI for the Eurozone was revised higher, offsetting the sting of lower inflation. While the European Central Bank is widely expected to add stimulus next week, this plan was clearly telegraphed allowing investors to fully discount the move. Therefore even though the prospect of ECB easing is negative for the euro, the lack of surprise may actually be positive for the currency.

#3 Europe’s COVID-19 Outbreak is Slowing

Last month’s aggressive lockdowns in Europe are finally bearing fruit as there are signs that Europe’s COVID-19 outbreak is slowing. New virus cases in France fell to 4,005 on Monday from a peak above 86,000 in early November. Virus cases in Spain are just above 10,000, down from more than 25,000 on October 30th. In Italy, there were 16,370 new cases yesterday compared to 40,902 on November 13th. The numbers are better in Germany as well but more volatile. The US on the other hand is bracing for the worst as test results from Thanksgiving gatherings start to come in.

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