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Monthly Wrap: EUR – Fears of double-dip Eurozone recession keep euro under pressure

Philip McHugh February 17th 2021 - 2 minute read

Key Takeaways:

  • Positive German inflation rate offers limited reassurance to EUR exchange rates
  • Another weak month of services PMIs forecast to weigh on single currency
  • EUR Monthly lows: £0.86, $1.19, C$1.52, A$1.55, NZ$1.66
  • EUR Monthly highs: £0.89, $1.21, C$1.55, A$1.59, NZ$1.70

The euro weakened over the course of the last month despite a return to positive territory for the German inflation rate.

While inflationary pressure showed signs of picking back up at the start of 2021, this was largely overshadowed by the latest signs of economic weakness within the currency union.

EUR exchange rates continued to be driven by shifting strength in the US dollar due to the negative correlation in the pairing, with USD fluctuating on a rise and then a retreat in US Treasury yields.

Even so, as the European Central Bank (ECB) indicated its willingness to leave monetary policy on hold for the time being, EUR exchange rates were able to find some renewed traction.

However, worries over the outlook of the economy lingered as January’s Eurozone services PMI remains trapped in contraction territory.

With the service sector continuing to drag on economic activity, the risk of a double-dip recession appeared to increase further, to the detriment of the single currency.

Although the manufacturing sector demonstrated another month of strong growth in January, this was not enough to diminish the impact of the underwhelming services PMIs.

If February’s raft of PMIs proves similarly discouraging, the euro could shed further ground across the board this week.

Forecasts point towards another weak month for the service sector, reflecting the impact of ongoing Covid-19 restrictions across the currency union.

Unless the data shows some degree of resilience within the sector, the single currency looks set to fall against its rivals ahead of this weekend.

On the other hand, if the latest German and Eurozone economic sentiment indexes continue to show an improvement, EUR exchange rates may receive a degree of support.

Indications of increasing optimism among Eurozone businesses may encourage bets that activity may start to recover before the end of the first quarter, reducing the risk of another quarterly growth contraction.

Easing political tensions in Italy may also help to support demand for the euro, as long as new Prime Minister Mario Draghi continues to reassure markets and draw domestic support.

Any fresh sense of market anxiety over the ongoing impact of the pandemic and risk of extended global economic weakness could equally offer EUR exchange rates a boost, as more risk-sensitive currencies weaken.

Written by
Philip McHugh

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