Underlying confidence in the Euro-zone economy and Euro has been damaged severely again by the events on Friday. There will be further expectations of long-term capital outflows and speculation over a break-up of the Euro area. Global central banks will be uneasy over the pace of recent declines and some form of concerted support is certainly possible within the next few days. Sovereign debt fears are still likely to be the key catalyst for dollar support as yield support will be weaker. The Euro will remain at risk of a decline to at least 1.18 and potentially 1.1680 over the next week and even lower in the medium term. Nevertheless, timing remains critical and there looks to be little immediate value in selling below 1.20 given that the currency remains heavily over-sold.
The Euro was subjected to heavy selling pressure ahead of the US open on Friday as structural fears returned. There were reports that the French Prime Minister had stated that Euro at parity against the dollar would be good news.
The new Hungarian government stated that the economic situation was grave and claimed that the previous administration had issued false information. There were also comments over a possible debt default given the underlying economic situation.
These comments fuelled renewed fears over the structural outlook and there was a sharp widening of Euro-zone debt spreads with renewed unease over countries such as Spain and Portugal. There was renewed selling pressure on the Euro despite a denial of the French report. The Euro lost support at the previous 4-year low just above 1.21 and weakened to a low near 1.2050 on stop loss selling ahead of the US employment data.
The headline US employment report was weaker than expected with a 431,000 in employment gain for May which was the highest monthly increase for over 10 years. A very high proportion of the gains were due to government hiring for the census and the increase in private-sector payrolls was limited to 41,000 compared with expectations of a 190,000 gain. The data may cast some doubts over US economic strength, but there will still be expectations that it will out-perform the Euro-zone area.
Risk appetite still deteriorated following the data, especially as there was a sharp decline on Wall Street and the Euro weakened to fresh lows below 1.20 against the dollar as selling pressure persisted. There was no relief in Asia on Monday with the currency testing support levels below 1.19 on fears over capital outflows before a limited recovery.