Euro sinks to mid-August lows on worries over Eurozone growth

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24 October 2018

thomasdodds

The Euro sank to a two month low against the US Dollar this morning, falling sharply off the back of a very disappointing set of business activity PMIs out of the Eurozone.

A
ctivity in the Euro-area’s services and manufacturing sectors both eased back in October, driven largely by a very soft performance in Germany. The key composite PMI slid to just 52.7, well below consensus and its lowest level since September 2016. The Euro was already on the back foot on Tuesday on the news that the European Commission formally rejected Italy’s budget proposal, as expected.

The main headlines in the Eurozone this week are likely to come from Thursday afternoon’s European Central Bank meeting. As we mentioned in our ECB preview report, we will be watching closely for any comments during President Mario Draghi’s press conference on the bank’s confidence that core inflation in the Euro-area will begin to trend towards target in the coming months. Draghi will likely be quizzed over his recent comments at the European Parliament where he stated that he saw a ‘relatively vigorous’ pickup in core inflation, the key to ECB policymaking.

Sterling gains on custom unions report

The Pound staged a very brief rally against its major peers on Tuesday morning, buoyed by hopes that the EU could offer Theresa May’s government a UK-wide customs union in order to break the deadline over Brexit. The media report claimed that the European Union was investigating whether keeping the whole of the UK within the customs union, as opposed to just Northern Ireland, would solve the key Irish border issue. Gains for Sterling were quickly reversed, however, and the currency ended London trading just below the 1.30 mark against the US Dollar.

With Governor of the Bank of England Mark Carney not touching on monetary policy during his speech yesterday, and with economic data very light on the ground this week, Sterling will likely continue to be driven almost exclusively by Brexit news in the next few days.

ECB to hold policy steady this week, hint at rate hike?

The US Dollar eased back against the traditional safe-haven Japanese Yen and Swiss Franc on Tuesday, with a fall in global stock markets causing investors to flee riskier currencies. Some disappointing earnings data dragged US stock markets lower yesterday, with the Dow Jones index down around 2% lower at one stage. As is customary during such sell-offs, investors flocked to the safe-havens and away from those currencies deemed as riskier.

A number of Federal Reserve members will be speaking in the US this afternoon, notably members Mester, Bostic and Bullard. Aside from any meaningful comments here, we await Friday’s third quarter GDP numbers, which are expected to show that the US economy grew by a fairly healthy 3.3% annualised in the three months to September.