Under pressure, EUR/USD returns to March levels

The latest PMI (Purchasing Managers' Index) indicators for the eurozone point to an economy at a total standstill. The composite PMI index, encompassing developments in the manufacturing and services sectors, has crashed to 13.5, an all-time low. Drilling down, the manufacturing sector index stands at 33.6, while the services sector index is at the staggering level of 11.7. This collapse in the services sector is directly linked to the lockdown measures implemented in numerous countries. Unsurprisingly, given such data, the second-quarter eurozone growth picture looks set to be horrific. The market estimates a contraction in economic activity of 9.9%!

Added to which, Europe has once again been unable to agree on a recovery plan for the post-health crisis period, gradually raising the spectre of the return of political risk in the eurozone. Heads of state and government approved the €540 bn package of short-term support measures proposed by the Eurogroup two weeks ago. However they could not agree on the financing mechanism for the recovery plan. The ball is now in the court of the European Commission, which on 6 May is expected to propose a comprehensive support programme for reconstruction. At this stage, we know only that it will be based on both loans and solidarity transfers. It goes without saying that southern European countries like Italy and Spain are championing solidarity transfers, which would have the benefit of not increasing public debt, while northern European countries, led by the Netherlands, want loans. In summary, the European political imbroglio shows no signs of ending any time soon.

The fact that the recession is more pronounced in the eurozone than in other parts of the world and that the political response to the crisis is proving particularly slow strengthen our downside view for the euro in the weeks and months to come. At the end of last week, the coming together of these two factors pulled the euro down to a weekly low of 1.0735 – levels not seen since the end of March. Even if the ECB plays its role to the full and looks set to ramp up QE before June, it is not in a position to rival the combined firepower of the US Federal Reserve and Treasury. We are keeping our medium-term EUR/USD objective at 1.06 with an interim objective of 1.0636, which is a major level of support for this currency cross.

The euro also looks poised to continue its slide against the other safe-haven currency of the moment, the Japanese yen. The EUR/JPY pair has lost nearly 5% since the start of the year and has fallen nearly 3.2% in the space of one month. The objective that we set ourselves of 116 was reached last week, with a weekly low point of 115.54. The pair will likely continue to fall and reach its 2016 levels, when the global economy was being dragged down by the Chinese slowdown and the risk of deflation, so the medium-term target is 113. This scenario is also backed up by the technical analysis, since EUR/JPY is sitting beneath its main 100-day and 200-day moving averages.

Conversely, EUR/CHF remains perfectly stable, as it has in recent weeks, confirming that the repeated interventions of the Swiss National Bank (SNB) have been effective to date. According to the latest tally, which we update regularly, the SNB spent only 3 billion Swiss francs (CHF) in the second week of April to defend the 1.05 peg, compared with more than double that on average since the start of the coronavirus crisis. This seems to suggest a temporary reduction in the buying pressures on the CHF.

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