The euro made gains against the pound this week despite the fact that the bloc's business activity remained average, in part because UK Prime Minister (PM) Boris Johnson promised to “legally prohibit” extending the UK’s future EU trade talks beyond the end of next year, a very tight deadline.

Eurozone economic recovery

Eurozone business activity continues to expand slowly

According to IHS Markit this week, the Eurozone’s composite Purchasing Managers’ Indices (PMI) for services and manufacturing in December arrived at 50.6. This is slightly below economists’ forecasts for 50.7, as well as only a little above the 50.0 figure that signals economic growth. This tells us that, while the euro bloc’s activity continues to expand, its gains are moderate.

In particular, it’s thought that the Eurozone’s businesses are being weighed down by the ongoing Brexit uncertainty, as well as the US/China trade war. Although Europe isn’t directly involved in the negotiations, its factories export vast quantities to both countries.

Germany’s IFOs upbeat, as US/China trade deal signed

Although the Eurozone’s business expansion remains slow, Germany’s forward-looking Institute for Economic Research (IFO) statistics for December have improved. In particular, the business climate rose to 96.3 this month, above forecasts for 95.5, while German firms’ expectations have hit 93.8, well above November’s 92.3.

In part, this reflects the fact that US President Donald Trump recently announced that he’s reached a “first phase” trade deal with China. This may improve the global outlook in 2020, and so benefit Germany’s export-focused factories.

No Eurozone releases next week, Lagarde to watch in 2020

Next week there are no Eurozone or German economic releases due to the festive period. However, moving into 2020 the euro might be affected by the fact that Eurozone inflation stands at just 1.0% in November, roughly half the European Central Bank’s (ECB) official target.

This could encourage new ECB President Christine Lagarde to either further ease monetary policy, or convince the Eurozone’s more solvent members to lift their spending, to support economic growth and rising price pressures.

Also, the bloc’s outlook could be affected by the UK’s future trade talks, in particular as the UK is the world’s fifth largest economy, and Europe’s second largest after Germany.

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