May 2021 - Monthly Economic Outlook

Gain an overview of the latest developments on the currency market and anticipate fluctuation risks.

EUR/USD

High: 1.2135 / Low: 1.1713 / Variation: +2.51%

Thanks to a significant improvement in Europe’s economic outlook, the euro (EUR) has regained considerable ground against its main counterparts, particularly the US dollar (USD) (a monthly variation of +2.51%).

The latest majorly improved US indicator has been first-quarter GDP, at close to 7%. In Europe, although the indicators are not quite as rosy, the outlook remains very positive thanks to accelerated vaccination campaigns. Regarding central banks, the Federal Reserve and the European Central Bank remain in autopilot mode, and this is likely to continue at least until June, when new economic forecasts will be published.

A sharp upward revision of projections for the US is to be expected. In the short term, risk appetite should continue to favour the euro against the US dollar.

EUR/GBP

High: 0.8724 / Low: 0.8492 / Variation: +2.23%

The euro (EUR) posted one of its best monthly performances against the British currency (GBP) (+2.23% in April). There are several factors explaining this increase.

Firstly, on the UK side, all recent good news has already been incorporated into market prices (including economic reopening). Secondly, the euro has benefited from hopes offered by accelerated vaccination programmes. Thirdly, the pound is beginning to feel the impact of the Scottish general election scheduled for 6 May.

In the event of a Scottish National Party (SNP) victory, a new referendum on Scottish independence is likely, which could lead to a further fall in the British currency. Once this risk has passed, a new upswing in sterling is expected, with a target of 0.85 for the pair.

EUR/JPY

High: 132.37 / Low: 129.16 / Variation: +1.17%

The return of risk appetite in the foreign exchange market, primarily owing to optimism about the vaccination process and the forthcoming reopening of major economies, has seen a jump in the euro (EUR) against the Japanese yen (JPY) (+1.17% in monthly variation).

Unsurprisingly, the latest Bank of Japan (BoJ) meeting led to a new status quo in monetary policy. The central bank has lowered its inflation target to 2%. In 2023, inflation is forecast to reach only 1%.

Despite numerous liquidity injections and monetary policy innovations (such as yield curve control), the central bank remains unable to restore a sufficiently high level of inflation.

EUR/CHF

High: 1.1185 / Low: 1.0972 / Variation: -0.86%

After peaking at 1.1185 on 1 April, the euro-Swiss franc (EUR/CHF) pair fell rapidly towards its monthly low of 1.0974. Ultimately, there was little change in the monthly variation for the pair (-0.86%).

A bullish outlook is to be maintained, gravitating towards 1.15. However, in the short term, the euro lacks any real impetus to move higher. It is likely that the lifting of lockdown measures, which will start as of mid-May in several European countries and will lead to a jump in macroeconomic indicators, enabling the pair to escape from the 1.10-1.11 zone, where it has hovered for over a month.

EUR/CAD

High: 1.5187 / Low: 1.4725 / Variation: +0.26%

The euro/Canadian dollar (EUR/CAD) pair rose slightly in April (+0.26%), largely due to renewed risk appetite, which favoured the single currency.

On the central bank side, as expected, the Bank of Canada reduced the amount of its asset repurchasing (a move referred to as “tapering”). Sovereign debt buybacks have fallen from $4 billion a week to $3 billion. The slowdown in asset purchases comes as the Canadian economy rebounds more strongly than expected, despite uncertainties resulting from the pandemic.

Other central banks in the developed world may follow the same path as the Bank of Canada over the coming months.

EUR/AUD

High: 1.5677 / Low: 1.5429 / Variation: +0.81%

The European single currency (EUR) posted a solid performance of +0.81% in monthly variation in April. In particular, the euro capitalised on the acceleration of the vaccination campaign in Europe, raising hopes of a return to near normal conditions this summer. According to the latest vaccination figures, the EU is expected to reach herd immunity (70% of its adult population vaccinated) by July of this year.

In Australia, the latest inflation data (a rise of just +0.6% in the consumer price index in Q1) confirmed that the Reserve Bank of Australia's monetary policy will remain highly accommodative for a long time to come. A rate hike is not expected until 2024.

EUR/CNH

High: 7.8503 / Low: 7.6933 / Variation: +2.11%

As was the case against commodity currencies and the pound sterling, the euro (EUR) rebounded quite sharply against the yuan (CNH) in April (a monthly variation of +2.11%). This strong increase was mainly due to a rebalancing of traders' portfolios from their euro positions.

With the acceleration of the vaccination programme in the EU, many foreign exchange market participants anticipate a faster-than-expected economic recovery, which could favour the single currency in the medium term. There is a sizeable caveat, however. Hopes that Europe will economically outperform the rest of the world often lead to disappointment (as was the case last summer). It cannot therefore be ruled out that this sharp rise will lead to a consolidation, or even a decline, in the EUR/CNH pair in the coming weeks if developments on the pandemic front are less positive than anticipated.

EUR/HUF

High: 364.15 / Low: 356.27 / Variation: -0.65%

The euro-forint pair (EUR/HUF) remained relatively stable in monthly variation (-0.65%). As expected by foreign exchange market participants, the Hungarian central bank kept its monetary policy unchanged at its meeting on 27 April.

The key rate is still located at 0.6%, while the deposit rate remains negative at -0.05%. Hungarian monetary policy is expected to remain in autopilot mode until at least the end of the year. There is no likelihood of tapering. No rate increases are expected at present.

Only a reversal of the US Federal Reserve’s monetary policy – which is unlikely at this stage – could change the situation and force the Hungarian central bank to adjust its monetary policy.