The pound to euro interbank exchange rate gained somewhat this week, although it shed some of its gains later in the week. In part, this is because markets hope that the UK economy will rebound this year, following last month’s decisive UK election result.
However, turning to the Eurozone, it’s also because the Eurozone’s manufacturing sector remains in recession, which could prompt the European Central Bank (ECB) to keep interest rates low in 2020.
According to economics watchdog IHS Markit, the Eurozone’s manufacturing Purchasing Managers Index (PMI) for December reached 46.3. This is somewhat above forecasts for 45.9, yet remains below the 50.0 figure that signals economic growth.
So this tells us that the euro bloc’s factories are still in recession. In particular, of the Eurozone’s 18 members, Germany’s manufacturing sector is shrinking at the fastest pace.
Claus Vistesen, Chief Eurozone Economist at Pantheon Macroeconomics, says that "New orders and output are still falling, and while the rate of contraction—in new orders—has eased a tad, the overall picture is grim." So this has weakened the euro.
What with the Eurozone’s factories in recession, and the bloc’s wider economy growing only very slowly, it looks likely that new ECB President Christine Lagarde will keep interest rates at record lows this year. At present, the Eurozone’s interest rates stand at 0.0%. So we’ll see if Ms. Lagarde either reduces borrowing costs below 0.0%, or finds other ways to cut the cost of a loan for businesses and households.
In recent speeches, the new ECB President has called on the Eurozone’s more solvent countries to spend more, to lift economic growth. If Ms. Lagarde’s approach yields results this year, this may affect the common currency.
The future trade talks between the UK and EU may affect the euro in 2020 too. After all, the UK is the second biggest economy in Europe after Germany, so the terms on which British and European companies import and export with each other could impact the Eurozone’s economy.
Next week, key Eurozone data includes IHS Markit’s composite PMI for December, predicted at 50.6, and is due to be released released on Monday 6th at 09.00. We’ll also learn the Eurozone’s inflation figures for December, forecast at 1.3%, and due on Tuesday 7th at 10.00.
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