Economic Discrepancies in the Developed Countries to Spill into the FX Market
Last week, the International Monetary Fund (IMF) published its World Economic Outlook (WEO) report – a quarterly publication closely watched by traders and investors around the world. It highlights the recent economic developments around the world, from the developed to emerging and frontier economies.
It shows an estimated -3.5% Gross Domestic Product (GDP) growth for the United States, the worst year since 1946. However, that was somehow sweetened by the increase in the 2021 economic growth projection – GDP revised up to 5.1%.
In contrast, the Euro area GDP was revised down to 4.2%, although the fall in the economic output in the Euro area in 2020 far outpaced the one in the United States. Even more, the third wave of the pandemic generated a record month of unemployment in many European countries. In Spain, one of the main economies in the Euro area besides Germany, France and Italy, January ended as the worst month during the pandemic since the summer. More than 218k jobs were lost, and the unemployment rose by over 76k – hard to digest numbers, especially if we consider the gap between the vaccination race on the two sides of the Atlantic.
EUR and the USDCopy link to section
The economic discrepancies between the two economies are not likely to last long without implications on the currency market. We already see some sort of decoupling between the EURUSD rate and the U.S. stock market indices.
The week started with the EURUSD pair losing about a hundred pip points, while, at the same time, the U.S. stocks marched higher. It is too early to tell if this is just a coincidence or the start of something, but the currency market tends to reflect the economic performance of a country quite well in time.
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Prospects for the European economy turned gloomier with the pandemic. The recent hawkish shift in German politics (i.e., the Merkel successor, Amin Laschet, recently elected as a successor of Merkel’s CDU party) brings the prospect of a drawback from the fiscal support in Europe at a critical time.
The EURUSD cracked below 1.21 at the start of the trading week. We should not be surprised to see more consolidation ahead of the NFP report on Friday, but the prospects of a move to 1.20 and below should not be ruled out. European policies have to be revamped if Europe wants to maintain its competitive advantage. And it must start by providing its citizens protection in front of the pandemic.