In early February, there were many news reports Fiat Chrysler amongst others was warning about disruption to their supply chains, triggering a sell-off in European stock markets which also weighed on the single currency.
Following on from this, the 14th to 19th of February saw the euro at some of the lowest levels against the pound since before the Brexit Referendum in June 2016, with GBPEUR interbank rates rising to 1.2039. The 19th and 20th also saw the euro reach fresh lows against the US dollar, as the euro lost value.
As the severity of the health and economic crisis began to take shape globally, it became apparent the issues were not just confined to Europe, and many players in the global economy would also suffer, including the UK and the US.
Rising uncertainty and fears of global recession resulted in many investors abandoning investments in more risky emerging markets where they had been enjoying higher returns, to repatriate to the relative safety of the US dollar, but also the euro.
The single currency benefitted from this ‘risk off environment, since the euro has for a long time been used as a funding currency because of the negative interest rates in the Eurozone. The negative rates make it an attractive currency to borrow in, and investors have been using this for ‘carry trades.
A carry trade is where an investor borrows in a low interest currency, such as the euro, and then invests in a higher yielding one, eg the New Zealand dollar. This trade can also be used to invest in other assets like stocks and bonds from around the world where interest rates are typically higher to attract investment.
The euro reached a peak against the pound of 1.0533 on the interbank rate on the 19th March, which was the strongest it had been since 2008, or in 12 years. However, in a display of weakness too, it was very soon lower still against the US dollar touching record weakness against the US currency.
Part of this behaviour is explained by some volatile movements on the US dollar, since EURUSD is the worlds most frequently traded currency, meaning large movements on the US dollar can influence EURUSD and affect the euro against other currencies.
As well as the 12-year high against the pound, in March the euro also reached a two-year high against the Canadian dollar and an 11-year high against the Australian dollar, further highlighting the strength it experienced against all of the majors.
Despite the euro reaching such record highs so recently, it has not taken too long to lose ground once again. April has seen the release of some of the latest economic data surrounding the Eurozone economy and as predicted the news has not been favourable. A manufacturing survey for the whole of the Eurozone dropped to a 92-month low, and record lows have been seen in other surveys.
A key worry for investors is the economic path ahead. It is not doubted many countries will struggle with recession, but markets need assurance that governments and central banks are doing their best to contain the crisis and create a map to prosperity in the future.
April has seen the euro weaken as investors become fearful over what might lie ahead for debt problems in the Eurozone, with mounting disparity in the approach on debt consolidation.
Essentially, Italy, Spain and France seek mutual debt obligation in the form of ‘Eurobonds, making it less costly for countries like Italy to borrow money to rebuild their economy after the crisis. Germany and the Netherlands however feel each country should take responsibility for its own debt and are resisting such changes.
Further development on this topic is likely to prove crucial in determining how the euro performs, with signs of agreement being reached likely to support the euro, whilst rising concerns that the economic fallout will be significant may lead to euro weakness, based on history and current behaviour.
As we can see the euro has fluctuated considerably between weakness and strength because of the Coronavirus, and the effects global uncertainty can have in the currency markets.
For More information on global events likely to impact the euro during April and beyond as the impact of Coronavirus continues to develop, download our monthly currency forecast below.
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