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Monthly Wrap: EUR – euro under pressure as signs point towards slowing Eurozone economy

Philip McHugh May 2nd 2018 - 2 minute read

Key Takeaways:

  • European Central Bank maintains dovish policy outlook
  • Markets worried by signs of easing Eurozone growth
  • EUR Monthly lows: £0.86, $1.19, AU$1.57, NZ$1.66, C$1.54
  • EUR Monthly highs: £0.88, $1.24, AU$1.61, NZ$1.72, C$1.59

Confidence in the underlying strength of the Eurozone economy continued to ease over the course of April, with domestic data proving largely disappointing in nature.

March’s raft of Eurozone manufacturing and services proved discouraging for investors, even though the indexes remained firmly within expansion territory.

While growth picked up in both France and Germany this was not enough to offset the weakness seen elsewhere within the currency union, where growth slowed to an eighteen-month low.

This gave the European Central Bank (ECB) little cause for confidence at its April meeting, where President Mario Draghi maintained a generally dovish stance on monetary policy.

Although Draghi noted some optimism in the domestic outlook investors were disconcerted to hear that there had been no discussion of the end of quantitative easing at the meeting.

As policymakers also expressed concern over the relative strength of euro exchange rates this encouraged a fresh bout of selling.

With the central bank looking set to leave its quantitative easing programme in place for some time to come, with any changes at the June meeting looking unlikely, the mood towards the single currency naturally soured.

Although the latest German consumer price index reading bettered forecast, avoiding a contraction on the month, this was not enough to give the euro any particular boost against its rivals.

So, how is the euro likely to perform in May?

As long as signs point towards the Eurozone economy losing momentum EUR exchange rates could struggle to find any traction.

Even if the currency union continues to outpace its economic rivals any slowing, however limited, is likely to weigh heavily on the appeal of the euro.

With the Eurozone not permanently exempt from threatened US tariffs on steel and aluminium concern over the domestic outlook could persist in the coming weeks.

Any widening of the German trade surplus may provoke jitters, given the more protectionist stance of the Trump administration.

A stronger US dollar is likely to keep the euro under some degree of pressure, meanwhile, as markets continue to bet on the odds of the Federal Reserve raising interest rates three more times this year.

If domestic inflation shows signs of picking up this could offer support to EUR exchange rates, even though anything short of a significant upside surprise is unlikely to alter the outlook of the ECB.

Written by
Philip McHugh

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