Major economies in the Eurozone are failing to escape a recession, and the Euro is falling. If the present economic data and fundamentals are any indication, things will only become messier before they get better.
The Currency: Euro
The one currency used across the Eurozone, the Euro, has been under significant selling pressure compared to several other currencies, most notably the dollar. The sharp decline started in June of 2021 and accelerated in August that year, falling for four consecutive months. Some reprieve for the pair came in December 2021, but punishment started in January 2022. By April 2022, the EUR/USD pair had not only broken through its significant support at 1.10 but also fallen below the vital support of 1.05 by June 2022. After that, everyone had their sights set on parity, and in July 2022, the Euro fell to a new low against the dollar. The Euro hit a new low against the US dollar of 0.9877 earlier this month.
In 2021, when the Fed’s monetary policy stance shifted, the Euro fell in value versus the dollar. Rising US interest rates initiated by the Federal Reserve Board last year gave the currency enormous strength and weakened the Euro. With inflation hovering above a four-decade high, the Federal Reserve has modified its monetary policy stance in the hopes that higher interest rates would drive inflation back down to more manageable levels.
Additionally, Eurozone inflation is four times the ECB’s objective of 2%, reaching heights not seen in almost 40 years. For the Eurozone as a whole, inflation was reported at 9.1% in the previous month. Because of this, the European Central Bank (ECB) is under intense pressure to take more measures to curb inflation. At this moment, it seems likely that the ECB will do the unthinkable this week and increase interest rates by 75 basis points, which would be a historic first. The conclusion of the ECB meeting is expected at 12:15 GMT on Thursday.
Investors worry that a rise in interest rates will make matters worse by raising the cost of borrowing money and adding to the stress felt by consumers who are already carrying substantial amounts of debt. If the European Central Bank (ECB) doesn’t raise interest rates by 75 basis points on Thursday, a hike of 50 basis points would still push the economy rapidly into recession. The final composite Purchasing Managers’ Index (PMI) from S&P Global, viewed as an indicator of the economy’s health, dropped to an 18-month low of 48.9 in August from July’s 49.9, which was lower than a preliminary estimate of 49.2 for the month. Contracting numbers are those that fall below 50.
The largest economy in Europe, Germany, had its spending on services fall for a second consecutive month in August, according to figures published today. Rising prices and declining confidence dampened domestic demand, contributing to this trend. France is the second biggest economy in the Eurozone, but its services sector has been losing speed. It is only growing modestly as of late, with purchasing managers predicting a bleak outlook for the future. As firms worried that increasing prices would cut their revenues and reduce consumer demand, the service sector in Italy saw its growth slow to its worst level since January.
The energy crisis is another critical issue for the Eurozone. Concerns about shortages and strengthened predictions of a recession and a severe winter contributed to a 30 per cent spike in petrol prices throughout the continent on Monday. These very high costs have a detrimental effect on businesses and households. While the European Central Bank (ECB) cannot directly affect the energy crisis, it significantly impacts economic indicators, the Euro, and ECB monetary policy.
It’s improbable that Thursday’s ECB policy would boost the economy of the Eurozone or the Euro. In my view, things will only get worse for the Eurozone and the Euro in the near and medium term. As a result, a decline in the Eurozone’s economy is possible, and the EUR/USD might fall to 0.95 or below.