The euro has seen losses against the pound on the interbank exchange so far this week, as the pound strengthens as MPs’ decide to legislate against a ‘No Deal’ Brexit.
However, in addition, the euro has been weighed down this week, because of increasing evidence that Germany, the Eurozone’s largest economy, could be headed for recession. For example, we learnt this Monday that Germany’s manufacturing PMI, from IHS Markit, fell to just 43.5 this month, easily below the 50.0 figure that points to growth. In addition, this Thursday, it was revealed that Germany’s factory orders tumbled by -5.6% in July compared to a year ago.
In part, this is because the USA’s and China’s trade war is cutting demand for German exports, like industrial components and cars. Germany’s manufacturing sector makes up 20% of its GDP, and is arguably the Eurozone’s backbone, so if German factory activity continues to contract, Deutschland may soon enter recession.
Meanwhile, the European Central Bank’s (ECB) interest rate decision next week is being tipped to affect the euro on the interbank market. This is because, to support the Eurozone’s economy and lift stagnant inflation in the bloc, the ECB is forecast to cut interest rates again, and restart its Quantitative Easing (ECB) program. In particular, it’s thought that the ECB will cut its deposit rate, which it charges commercial banks to park money at the ECB overnight, further below -0.4%.
Also, the ECB may begin to inject up to €30 billion a month in QE into the Eurozone’s financial system, to stimulate economic activity. However, while the ECB’s actions could perk up the Eurozone, they simultaneously tend to devalue the euro. So the ECB’s decision may be worth watching for on September 12th.
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