News & analysis

Recent euro price action has reflected weak economic sentiment stemming from the coronavirus outbreak.

Last week, the currency fell through a 34-month support level against the dollar, after plummeting nearly 3% since the beginning of February and recording fresh lows for 13 consecutive sessions.

Sentiment and forward-looking indicators have shown deteriorating investor confidence on the back of worsening coronavirus-related fears, although it is still too soon to gauge the actual economic impact in hard data.

January’s ECB meeting minutes noted that policymakers were already concerned with signalling too much optimism ahead of time, a sentiment that has proven wise in light of the recent confidence downturn.


Chart: 13 consecutive sessions of fresh lows for EURUSD in February


A gloomy short-term outlook for the eurozone economy was confirmed by February´s German ZEW economic sentiment survey:

  • The headline figure slumped to 8.7 from 26.7 in January and was below the consensus expectation of 21.5.
  • The dip reversed the positive trend shown by the survey since August 2019 and the 4-year record high printed in the previous month. This is the first explicit sign in eurozone sentiment data of the economic impacts of coronavirus.
  • The large gap between expectations and the actual outcome may in part be explained by the timing of the survey, as consensus was derived from a poll to Bloomberg economists conducted around 1-2 weeks ahead of the actual survey. This mismatch, however, also hints at the high speed at which markets have repriced in the risks of the virus outbreak.



In contrast to the ZEW economic sentiment, headline PMIs data from France, Germany and the eurozone overall seemed to be unaffected by coronavirus uncertainty at first glance, and in fact, printed higher than the consensus in most cases.

This was especially true about the German manufacturing index, which beat expectations with an increase from 45.3 in January to 47.8 in February, compared to the 44.8 consensus.

However bullish these numbers might look, there is an important caveat in the design of PMIs that may have made the headline figure look much better than reality.

Markit’s methodology for constructing the PMIs assumes that the increase in delivery times is a positive sign of higher demand and a buoyant economy, making a poorer Delivery Time sub-index a bullish contributor to the headline PMI.

While this may be true at the best of economic times when suppliers reach their full capacity constraints, the current slowdown in delivery times could most likely be attributed to the supply-chain disruption from the coronavirus hit in China, rather than businesses reaching their full potential.

The ‘flash’ seasonally adjusted Suppliers’ Delivery Times Index was at 47.0 in February, down from 55.1 in January. In other words, increased manufacturing PMIs may, in fact, paint a more negative picture for the eurozone than they suggest.

The available set of sentiment data in the eurozone will be completed next week with the release of the IFO expectations survey in Germany on Monday 24th, and the eurozone Economic and Consumer Confidence indicators on Thursday 27th. Preliminary February inflation data from Germany and France on Friday 28th will add to the overall macro picture.

While the economic effects from coronavirus will eventually fade from the eurozone outlook, sour investor sentiment at present should continue dictating euro’s weak performance in the following weeks.


Authors: Olivia Alvarez Mendez and Ima Sammani, FX Market Analysts at Monex Canada. 



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