The past couple of months can be associated with a reassessment by the market about the likely policy decisions of several major central banks. For many, this has meant less hawkish policy is now expected in the year ahead. The change in the market consensus regarding U.S. growth led to a sea change in expectations about Federal Reserve policy. Since the market had been positioned long of dollar through the spring and summer and into the autumn, the inevitable reaction was a drop in the value of the greenback. Between mid-November 2018 and early January 2019, the value of the DXY USD index dropped around 2.7 percent. Since then, the market has been coming to terms with the fact that it is not just the outlook for the greenback that has soured. The ECB, Riksbank, RBA and RBNZ are among the central banks to which the market is currently ascribing a more dovish outlook. Measured since the middle of January, the USD has been the second best performing G10 currency after the British pound. At the January policy meeting, the ECB acknowledged that the balance of risks for the Eurozone economy had shifted to the downside. This was not the first time that ECB President Draghi had recognised the softer tone of recent data releases but he now admitted that there was unanimous acknowledgement within the Governing Council of weaker growth momentum. Going into the January policy meeting the market had already pushed back the threat of ECB rate hikes into next year, meaning that the EUR recovered some of its losses in the immediate aftermath of Draghi’s speech. Overall, however, the market is likely to have judged the ECB to have shifted into a moderately more dovish gear and this will weigh on the outlook for the EUR in the months ahead.
While there is still optimism that the slowdown in European growth will be shallow and temporary, politics could cast a longer shadow over the EUR this year.