The single currency is struggling to find support, having fallen more than 7.5% so far in 2021. The euro is now the second worst-performing currency after the Japanese Yen, and the fourth wave of Covid-19 infections is adding to its losses.
Just when we thought that Covid-19 risks were behind us, Europe became the new epicenter of the pandemic. Austria is the first country to reimpose a full lockdown starting today, with further curbs expected to come into force in other European countries.
The Netherlands and Germany have also seen a rapid increase in cases, with the current German acting health minister warning of a full lockdown. Meanwhile, Italy, Greece, Slovakia, and Belgium began imposing new restrictions, especially on the population who are unvaccinated.
Business activity on the continent is already suffering from supply chain disruptions and high costs, and adding further Covid-19 restrictions will only exacerbate these issues. As a result, the upcoming purchasing managers’ index survey released on Tuesday is expected to paint a gloomy picture of Europe’s economy. The PMI index for manufacturing is projected to decline to 57.2 from 58.3 and the services index is expected to fall by a similar margin to 53.6. Investors will be monitoring Germany’s data closely, where record infection numbers are anticipated to put more pressure on business activity.
Shorting the euro on rallies should remain the preferred trading strategy in currency markets, especially with several Fed officials signaling the possibility of a faster taper when the FOMC meets in December.
The Federal Reserve’s preferred measure of inflation, the PCE price index, will be released on Wednesday and traders will be watching it very closely as consumer prices earlier this month showed US inflation rose at its fastest pace in 30 years. If the PCE data surprises to the upside, the case for faster tapering will grow, as will the argument for hiking interest rates sooner.
Markets are now anticipating a 59% chance of three or more rate hikes by the end of 2022, compared to 44% a month ago, according to CME FedWatch tool. These probabilities are likely to change after Wednesday’s PCE release. Given the low liquidity in a holiday-shortened trading week due to US Thanksgiving on Thursday, expect volatility to pick up in FX if we see big deviations in data from current expectations.
