Are things looking up for the euro?

Currencies Direct July 26th 2013 - 2 minute read

Times have been tough in the Eurozone for a while, but latest indicators suggest the bloc may be recovering better than predicted. Latest service sector and manufacturing figures from countries using the euro were far stronger than predicted, offering hope that the 18-month long recession may soon be over.

Across the Eurozone, manufacturers reported the largest monthly increase in output since June 2011, registering an expansion for the first time since February of last year. Service sector activity fell only marginally, recording the smallest decline in the current 18-month sequence.

Chris Williamson, chief economist at survey compiler Markit, believes the data will provide a "summer fillip" to policymakers, arguing that there is "light at the end of the tunnel for austerity-hit periphery countries where political and social tensions have risen". For the European Central Bank (ECB), the report will offer a little extra room for manoeuvre over the coming months.

"The ECB in particular will be feeling much more confident in its expectation of the region returning to growth by the end of the year," adds Mr Williamson, who says there is "encouraging evidence to suggest that the euro area could ‚Äď at long last ‚Äď pull out of its recession in the third quarter".

Following the data the euro exchange rate with the dollar rose, trading close to six-week highs.

In a further sign of stability in the Eurozone, EU finance officials this morning (26 July) approved a ‚ā¨2.5 billion loan for Greece after the austerity-hit country met terms for the latest tranche of its bailout package.

On the anniversary of ECB chief Mario Draghi's "whatever it takes" speech, it seems the immediate crisis is over. A year ago today the Italian banker said: "Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough."

Just take a look at bond yields and the effect of that pronouncement is obvious. Spanish ten-year bond yields were at 7.5% before Mr Draghi's speech; now, they're at a far more manageable 4.6%. Across the Eurozone, bond yields have narrowed between periphery countries and more stable members like Germany.

"We are one year on from 'whatever it takes'," said Kit Juckes, a global strategist at Societe Generale. "The euro has held together, no one has left, spreads are tighter, PMI is back up, the sun is shining and even the Spanish unemployment rate has fallen."

However, the euro is far from out of the woods. Structural problems remain and no amount of talking by Mr Draghi can fix them.

J√ľrgen Stark, the ECB's former chief economist,¬†believes the outlook is less positive than it would appear.

He doubts whether the pledge amounts to a "sustainable reassurance", telling Germany's Handelsblatt newspaper: "I think the crisis will come to a head in late autumn. We are entering a new phase of crisis management."

In this event, Mr Draghi may need to turn to his secret weapon ‚ÄstOutright Monetary Transactions (OMT) ‚Äď by which the ECB promises to buy unlimited quantities of government bonds from a country struggling with its borrowing. The central banker has been able to keep his powder dry until now, but for how much longer, no one can say.

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