EUR/USD rally unlikely to persist – HSBC

The euro outperformance has been driven by risk on-risk off (RORO), rather than a narrowing of idiosyncratic European risk. Economists at HSBC remain positive on the USD’s outlook against the EUR where fiscal frailties may become a challenge in the months ahead.

Key quotes

“The Next Generation EU may not do much to arrest potential political angst in Europe, should unemployment rates rise and remain elevated as policy support diminishes later this year. Further financial integration should help the economic response for many countries, but it will not diminish the threat of Euroscepticism across the region, which could rear its head at the polls in the future.”

“The EUR's performance against other G10 currencies points us more towards a traditional 'Risk On-Risk Off (RORO) environment that has been dominant since late February for FX. There are some signs that the broader RORO Index may have peaked, suggesting a little more idiosyncratic behaviour is starting to creep in. But it is early days right now.”

“We are still expecting a relatively slow global economic recovery, with downside risks, and in such a world, we would expect fiscal policy flexibility to support currency strength. As a result, we remain positive on the USD's outlook against the EUR where fiscal frailties may become more of a challenge in the months ahead.”