Sterling strengthened versus the euro on the interbank market this week, at one point hitting a 31-month high, its strongest since mid-May 2017.
Partly, this is because the financial markets are increasingly factoring in the possibility that the Conservatives will win next week’s UK general election. However, turning to the Eurozone, the common currency lost out this week, because the euro area’s economy remains weak.
For example, according to watchdog IHS Markit’s composite PMI for the Eurozone for November, measuring activity in the bloc’s services and manufacturing sectors, output hit 50.6 this month. This is 0.3 points above October’s figure, yet barely above the 50.0 figure that signals stagnating economic growth.
Meanwhile, official statistics agency Eurostat confirmed this week that the Eurozone’s GDP expanded by 0.2% in Q3, over the Summer, far slower than industrialised counterparts like the United States. So this slow economic activity has weighed down the euro.
Meanwhile, another factor why the euro has fallen in value this week is because Germany’s Social Democratic Party (SPD) has elected a little-known pair as leaders.
This week, SPD members chose Saskia Esken and Norbert Walter-Borjans to lead the party, over more established and better-known rivals. Mrs. Esken and Mr. Walter-Borjans are critical of the SPD’s junior role in Chancellor Angela Merkel’s ‘Grand Coalition’ government, which they feel props up Dr. Merkel while reducing the SPD’s visibility.
As a result, the pair may try to renegotiate the coalition, or even pull out, which may destabilise Germany’s political outlook in 2020. So this possibility has also weakened the euro this week.
Turning to next week, there’s key Eurozone economic data and the European Central Bank’s (ECB) interest rate decision on Thursday 12th, both of which may affect the euro.
In particular, Germany’s inflation statistics for November are published next Thursday at 07.00 GMT, and pencilled in to fall to 0.9%, from October’s 1.2%. If so, this would confirm that price pressures in the Eurozone’s largest member remain well below the ECB’s target of close-to-but-below 2.0%.
This may encourage the central bank to keep interest rates at 0.0% for the foreseeable future, while maintaining its policy of extraordinary monetary easing. This may affect the euro.
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