Euro is at its highest levels in ten days

The euro is recovering today against the dollar and achieving gains of approximately 0.2%, reaching the level of 1.06953 at the peak of the rises, which represents the highest levels in approximately ten days.

The strength shown by the euro today comes with services activities beating expectations in the Eurozone, especially its surprising growth recovering in Germany, and despite the acceleration of the contraction in manufacturing activities in April.

This growth in economic activity, which has reached its fastest pace in 11 months, should provide support to the euro by strengthening market assumptions about the interest rate path, with no more than two cuts expected for the rest of this year by the European Central Bank (ECB).

Positive surprises from the Eurozone, especially the major economies, in addition to lowering expectations about lowering interest rates, would reduce the superiority of the dollar, which has now enjoyed very high Treasury yields, supported also by pessimism about the impossibility of lowering rates in June, or in the worst-case scenario, in the whole of 2024.

In today’s data, we saw the S&P Global / HCOB preliminary PMI reading for April in France, Germany and the Eurozone. While services activities across these economies exceeded expectations, the significantly larger than expected growth of this sector in Germany for the first time since July of last year was one of the most prominent factors that moved the markets.

This surprising growth in service outputs in Germany came with the growth of new business for the first time in ten months in addition to moderate growth in demand at the beginning of the second quarter, according to S&P Global / HCOB. On the other hand, factory activities continued to contract, with the fastest pace of decline in new factory orders in five months in Germany and continued to decline for two years throughout the euro area.

Today’s figures helped German ten-year bund yield rise again and regain the 2.5% level, while their US counterpart is still rising today and reached 4.631%.

While the euro needs more positive surprises and higher interest rates to reduce the yield gap between US Treasury bonds and their counterparts in the Eurozone.

So, the US Treasury / German bund yield gap is still at 2.129%, which is not far from the highest level since 2019, which we witnessed last week.