Monthly Wrap: EUR – Easing Eurozone inflation and economic activity drag on euro

Philip McHugh December 7th 2018 - 2 minute read

Key Takeaways:

  • Weak German economic performance leaves euro under pressure
  • Slowing Eurozone inflation and growth limit odds of ECB interest rate hike
  • EUR Monthly lows: £1.11, $0.87, AU$0.63, C$0.65, NZ$0.58
  • EUR Monthly highs: £1.15, $0.89, AU$0.65, C$0.67, NZ$0.61

As German factory orders continued to contract in October, albeit at a slower pace than forecast, this kept the euro under pressure.
Investors have seen little reason to favour the single currency in recent weeks as the Eurozone economy demonstrated fresh signs of a slowdown.
November’s raft of Eurozone manufacturing and services PMIs offered little cause for confidence, with the service sector slowing to its lowest level of growth since September 2016.
Coupled with an easing in inflationary pressure this gave the European Central Bank (ECB) policymakers greater incentive to leave interest rates on hold for longer.
Even though the Italian economy showed signs of improvement, its service sector showing a surprise return to growth, this was not enough to shore up the euro for long.
Signs of an increased willingness to compromise among Italian politicians also failed to galvanise any significant support for the single currency, with investors still wary of a continued loss of economic momentum in 2019.
Political developments in France rattled confidence in the euro, meanwhile, as backlash against President Macron highlighted the risks that still face the future unity of the Eurozone.
Even if the ECB winds down its long-running quantitative easing programme at its December meeting, as widely expected, this is unlikely to give EUR exchange rates any particular boost.
As long as policymakers continue to express caution over the economic outlook demand for the euro is likely to remain limited.
December’s Eurozone PMIs could put additional pressure on the single currency unless there are signs of renewed growth across the currency union.
If the headline PMIs pick up from their recent lows, however, this may offer EUR exchange rates a solid rallying point.
Although any improvement in the PMIs is unlikely to drive a significant rebound in Eurozone economic activity in the fourth quarter this could still encourage the euro to strengthen.
Stronger German business confidence indicators may also give the single currency a leg up against its rivals, with signs of resilience within the Eurozone’s powerhouse economy boding well for the wider union.
On the other hand, evidence of a continued decline in German sentiment and trade outlook would leave EUR exchange rates exposed to fresh selling pressure.

Written by
Philip McHugh

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