Chart Chart Chart

Chart of the Week : Real Effective Exchange Rates (EUR and USD)

Macro
CD
Christopher Dembik

Head of Macro Analysis

Summary:  In today’s ‘Macro Chartmania’, we focus on the Real Effective Exchange Rate (REER). All the data are collected from Macrobond and updated each week.


Click to download this week's full edition of Macro Chartmania composed of more than 100 charts to track the latest macroeconomic and market developments.

The below chart shows the Real Effective Exchange Rate (REER) for the euro and the U.S. dollar. This is the weighted average of a country’s currency against a basket of other major currencies. It is used for international comparisons, especially by the International Monetary Fund and the World Bank, for instance. Currently, the U.S. dollar is 27 % too high compared to the euro, based on the REER. The last time the gap was so wide was when the outbreak started in 2020. This is only the beginning, in our view. U.S. dollar net speculative positioning continues to increase at a speedy pace. Several factors are pushing investors to look for the default safe haven : risk of technical recession or stagflation in several developed economies (France, Germany and the United Kingdom, for instance), skyrocketing commodity prices (especially for agricultural goods due to the Ukraine war and the drought in India), equity bear market, lockdowns in China which will push down global GDP growth this year, persistent inflationary pressures (resulting from supply chain disruptions and higher wage compensations, amongst other things) etc. From a technical point of view, the USD is likely to move upward in the short-term. We expect that risk-off waves will push the DXY index well above 105.00. The EUR/USD is likely to remain under pressure too.

How long do you think this can go on before something snaps ? My bet : the European Central Bank (ECB) will have no other options but to increase interest rates at the July meeting to bring support to the EUR and close the gap with the U.S. dollar. Timing is everything : the July meeting will take place just one day after the release of the first estimate of the eurozone Q2 GDP. If the Governing Council decides to move forward with a rate hike, this would reduce imported inflation, in theory. The ECB is caught between a rising dollar and a weak euro. This is simply intolerable. Several governing council members, including those considered as the most pragmatic, are now leaning in favor of a rate increase and exiting negative rates by the end of the year (Banque de France’s Villeroy de Galhau, for instance). This will certainly not solve from one day to another inflationary pressures within the eurozone (inflation is partially driven by external forces such as commodity prices). But it will at least reduce the FX-passthrough into inflation which is becoming problematic. 

Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region

Singapore
Singapore

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.