We have had some negative news out of Europe this morning, which held back the euro slightly. First it was news that German manufacturing orders slumped at their fastest pace in over two years. New factory orders fell 4.2% month-over-month at the Eurozone’s largest economy, weighed down by a 6% drop in foreign orders. This was the biggest drop since January 2017, raising further alarm bells over an ailing economy. Then, reports emerged that Italy may cut its 2019 GDP forecast to just 0.1% from 1% previously and that this would lead to a 2019 budget deficit of 2.3-2.4 percent. The news weighed on Italy’s FTSE MIB while the EUR/USD eased to around 1.1220.

However, the EUR/USD then stopped falling after the initial move lower, suggesting that the negative sentiment towards the Eurozone may already be priced in and that the single currency may have carved out a near term bottom against the US dollar, in light of yesterday’s rally from around the key 1.12 long-term support level and given the prospects of a softer Brexit. Market participants are not rushing to increase their dollar holdings given that the US monthly jobs report is just a day away and some of the leading employers indicators released this week have disappointed expectations. If the jobs data were to miss forecasts for the second consecutive month, then we could see a more pronounced sell-off in the dollar on Friday.

In fact, regardless of the jobs report, we think that the dollar will struggle over the medium term to sustain its recent gains thanks to the Federal Reserve’s U-turn on interest rates recently. With the Fed no longer being the sole hawk in a sea of dovish central banks, this has undoubtedly reduced the appeal of the greenback for some yield-seeking investors. This may be a welcome relief for some high-beta and emerging market currencies, especially if the US and China finally agree on a deal to end their trade dispute. If so, Chinese demand for German exports could rebound and that in turn could help to support the euro. President Trump has confirmed he’ll meet with Chinese Vice Premier Liu at the Whitehouse today.

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