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Analyst Insights: Euro Dollar and the Germany 30

Posted on: 08 August 2017 , by: Darren Sinden , category: Market Review

Euro Dollar and the Germany 30

Euro strength is closely correlated to Germany 30 index weakness. We look at the prospects of a continuation of both trends.

The Euro has gained well over 11% against the US Dollar this year. Because an ineffective White House, under Donald Trump, has failed to enact any major policy or legislation. That’s despite 6.5 months in office. In fact when measured on trade weighted basis, as Dollar Index, the US currency is on course for its worst seven month period, in any year since 1986.

At the same time, the European single currency has benefitted from a perceived change of tone at the ECB. Following Mario Draghi's hawkish comments at the Sintra symposium in June.

The market now believes the ECB may taper QE and tighten monetary policy ahead of schedule. And in doing so steal the thunder, from what is seen as an increasingly diffident US Federal Reserve. The Euro has also been boosted by a stream of broadly upbeat economic data. Whilst comparable US data has largely undershot analysts’ expectations. 

The chart below plots the level of surprise or deviation from consensus forecasts for key data from both the Eurozone and the USA. Readings below zero indicate continuing data disappointments.

Citigroup Economic Surprise Indicator

Source: Thomson Reuters Datastream

Whilst the appreciation of the Euro has been positive for EURUSD bulls, it has not been good news for leading German equities. Many of which are exporters, who have benefited historically from Euro weakness. This has made their products cheaper to foreign currency buyers. As such, as the Euro has strengthened so the German 30 index has weakened. We can see this on the chart below.

Germany DAX Index

The Euro now trading with a $1.1800 handle vs the US Dollar, with the potential to go higher still over the summer months. The Germany 30 index (DAX) could well fall further and add to the circa -3.90% decline seen since June 20, 2017. During which time the Euro has added almost six big figures against the greenback. The political situation in Washington is becoming more chaotic by the day and there seems little scope for any political push back against the weak Dollar until Congress reconvenes in early September. Against that background being long EURUSD and/or short the Germany 30 index, over the next month, may look like an increasingly attractive proposition.


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