Euro falls to three-month lows despite PMI beat

he euro, and indeed most other G10 currencies, had initiated a rebound against the US dollar last week following the sharp sell-off witnessed after the June FOMC meeting. This rebound has, however, proved rather fleeting and the common currency is now back trading at fresh three-month lows. We think that this move has more to do with dollar strength rather than anything else. Friday’s US payrolls report is expected to show another solid month of job creation and investors are in a confident mood that we may see an upside surprise given yesterday’s beat in the ADP employment change number. This showed that private-sector employment rose by 692k in June, comfortably above the 600k consensus.

Meanwhile, economic news out of Europe has been rather mixed. As mentioned, this morning’s manufacturing PMI figures for June were impressive, with the index for the Eurozone as a whole revised up to a fresh record high of 63.4. Yet, there are signs of fragility still in consumer demand, which is providing a particular cause for concern. Retail sales in Germany sank by 2.4% year-on-year in May, well below the +10.1% priced in. Virus restrictions in Germany remain among the strictest in Europe and this presents a fairly significant downside risk to the bloc’s economy given the country’s large contribution to the overall output.

Concerns over delta variant keep lid on risk appetite

As we noted last week, investors also remain somewhat concerned about the spread of the delta variant around the world, and its potential impact on suppressing global demand. For now, currency traders are rather calm about the situation, although the safe-haven yen and dollar remain to top performers in the G10 in the past couple of weeks. For those countries that have rolled out vaccines to a large share of their population, casualty rates have been low, notably in the UK that looks on course to remove all virus restrictions on 19th July. There are, however, far more nations around the world that are still nowhere near reaching herd immunity. A number of countries in Asia for instance, where vaccinations rates have been rather low, are seeing a surge in cases and have imposed fresh lockdowns in the past few weeks. Until vaccines are rolled out to larger shares of the population in developing nations, we see it as likely that the market will experience bouts of risk aversion that could cap gains in high-risk currencies in the second half of this year.