Euro hit a year to date low against the U.S. dollar this week after quietly trending lower for the past 5 weeks, says Kathy Lien of

Economic performance and monetary policy direction are the two most important drivers of currency flows and in the case of euro, both have been calling for further weakness. #EUR/USD consolidated above 1.1550 for more than a week before finally breaking lower but even with today’s move, it is not a clear break as the new low was only a few pips below last week’s low. For EUR/USD to sink to the next support level on the 1.13 handle, the pair needs a solid break of the psychologically significant 1.15 level and right now it is just above it.

On a fundamental basis, there are plenty of reasons for the EUR/USD to underperform. There’s been a string of data disappointments from Germany and the Eurozone. PMI, factory orders, industrial production and today’s ZEW survey missed expectations. Investors are worried about the impact of rising energy costs and supply chain bottlenecks on corporate profitability.

On a monetary policy basis, the European Central Bank reduced PEPP purchases but their warnings against tightening too soon have investors looking for a rate hike in late 2023. Throughout this monetary policy cycle, the ECB lagged behind its peers and while they cut PEPP before the Federal Reserve tapered asset purchases, the Fed will surely lift interest rates before the ECB.

So not only is EUR/USD pressured by softer data and a dovish central bank, but investors are bidding the greenback higher ahead of next month’s Fed meeting where a taper announcement is expected. The euro is weak against the dollar, but its underperformance is the most dramatic against sterling, the Australian and New Zealand dollars.

EUR/GBP is down more than 2% from its September high, EUR/AUD lost value eight out of the last nine trading days while EUR/CAD declined 15 out the last 16 trading days. The Eurozone industrial production report keeps the downtrend intact as the decline in German industrial production signals weakness.

The US dollar extended its gains against the Japanese yen to fresh 2.5 year highs. Despite a nearly 3% decline in 10-year Treasury yields, the prospect of a strong inflation report led investors to buy the greenback against the Japanese yen, Swiss Franc, and euro. With ongoing supply chain shortages and energy prices on the rise, CPI is widely expected to tick higher in the month of September.

Since the beginning of the year crude oil has risen more than 60%. Over the past 12 months, prices at the pump have increased $1. The cost of heating oil has also risen by more than 65% and this is filtering down to higher prices for other goods and services. Sooner or later all of these price increases will cause material pain to consumers. The minutes from the last Fed meeting were released testerday, and given the central bank’s readiness to announce taper, the outlook should be bright.

Sterling is unchanged despite slightly weaker than expected employment growth. Stronger than expected average earnings and a lower unemployment rate keeps rate hike expectations for the Bank of England intact. Meanwhile all three of the commodity currencies traded higher today. AUD led the gains following stronger Australian business confidence The Canadian dollar was supported by oil, which held above $80 a barrel.

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