London (Reuters) – The euro retreated on Thursday after a two-month rally against the dollar, as Germany reported disappointing economic output for the second quarter and the Federal Reserve maintained its support for the U.S. economy.
The euro was set to end July with its best monthly gain in a decade, a 4.7% jump, but a shift in the bullish mood is threatening the milestone.
The euro lost about 0.34% to $1.1752 as the continent’s stock markets fell after disappointing second-quarter earnings weighed on morale EUR=EBS.
“The change in risk sentiment this morning has prompted some traders to buy the greenback as it has been a safe-haven play recently”, wrote David Madden, an analyst at CMC Markets. “The euro came under more pressure on the back of the German flash GDP reading.”
The German economy contracted by a worse-than-expected 10.1% in the second quarter, its steepest plunge on record, as household spending, business investment and exports collapsed during the COVID-19 pandemic.
“Now it’s official, it’s the recession of a century,” said DekaBank economist Andreas Scheuerle. The country’s statistics office said the plunge was the worst since 1970.
Other EU indicators were more encouraging. Euro zone economic sentiment, for example, rebounded more than expected in July. Industry gained, although became more gloomy.
Many traders, however, believe that the euro is on a structural long-term trend against the dollar after EU leaders agreed on a massive recovery fund that will bring the bloc closer to a fiscal union.
The target of $1.20 for the euro is a popular one among foreign exchange strategists, and demand for options that would benefit from such a rise shows bulls haven’t given up on more gains.
The fact that Fed Chair Jerome Powell didn’t shift his position to a more dovish one and called for more fiscal support to prop up the economy also helped the dollar.
Investors are now eying an impasse in Congress on another stimulus package and the latest weekly jobless numbers, due at 1230 GMT.
Advance GDP data is due at the same time from the United States, and it’s expected to be grim. Economists forecast an annualised 34% drop for the past quarter.
In Asia, the yen JPY= dipped 0.2% to 105.10 per dollar. Tensions with China dragged on risk, adding to pressure on the Antipodean currencies.
Sino-U.S. relations have deteriorated over issues ranging from the pandemic to Beijing’s territorial claims in the South China Sea and its clampdown on Hong Kong.
Elsewhere, the Turkish lira recovered from a record low against the euro EURTRY=. It remains under pressure from concern over depleted reserves and local demand for dollars despite state efforts to stabilise trading.