Sterling gained somewhat versus the euro this week, in part because the EU extended the UK’s Brexit deadline, thereby reducing the possibility of a ‘No Deal’ Brexit.
In addition, the Eurozone’s common currency has lost out, because even though the euro bloc’s economy continued to expand over the Summer, growth remain shaky and likely to slow further.
What’s more, this week we learnt that Eurozone inflation remains well below the European Central Bank’s (ECB) target, which could encourage new President Christine Lagarde to further ease monetary policy.
The Eurozone’s GDP (Gross Domestic Product) expanded by 0.2% in Q3, between July and September, according to official statistics agency Eurostat this week.
This was above financial market forecasts for just 0.1% growth. So this tells us that, in spite of both Brexit and the US/China trade war, the Eurozone economy is exceeding expectations.
However, in spite of this, it’s clear that the euro area’s GDP growth is modest, and forecast to weaken in coming months.
For example, Andrew Kenningham, chief Europe economist at Capital Economics, writes that “The slightly better-than-expected third-quarter GDP figure for the eurozone does not alter the fact that the region is expanding at only a very modest pace.” So this may affect the value of the euro, looking forward.
Furthermore, it’s worth adding that Eurozone inflation fell by 0.1% in October, said Eurostat this week, to just 0.7%. This is well below the ECB’s official target of close-to-but-below 2.0%.
This suggests that the Eurozone economy remains too stagnant to generate consistently higher price pressures, even with interest rates at 0.0%, and €20 billion a month in extraordinary stimulus, called Quantitative Easing (QE).
So, this may encourage new ECB President, former International Monetary Fund (IMF) Chief Christine Lagarde, to ease monetary policy even further, to shore up the euro bloc’s decelerating growth. We’ll see in the coming months, which could send the euro higher or lower.
There’s lots of important Eurozone economic releases next week, including IHS Markit’s composite PMI (Purchasing Managers’ Index) and September’s retail sales figures. These may influence the euro, as well as Brexit and developments in the US/China trade war.
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