EURUSD Gains As Eurozone Data Show Modest Return To Growth
EURUSD Gains As Eurozone Data Show Modest Return To Growth
The Euro (EUR) is gaining against the US Dollar this morning, with a mild market mood suggesting that investors are confident in the European economy and betting on further interest rate hikes from the ECB. This is backed by hawkish comments from ECB policymaker Klass Knot, who hinted that more rate hikes may be on the way towards the end of this year.
German GDP, the main driver of the Eurozone economy, is expected to remain strong in 2014, as a rebound in retail sales and an increase in service sector activity should help boost growth. The latest data from the German economy also showed that inflation rose, though this was only modestly above expectations.
Meanwhile, the French economy remained resilient in January as retail sales and manufacturing output grew at their fastest pace in more than six months. Nevertheless, the economy continues to be subjected to the challenges of higher energy prices and rising uncertainty over Ukraine.
Despite these ongoing challenges, the outlook for euro area households is still gloomy, owing to high inflation and fears of recession. Moreover, households’ saving ratios have reached new historical lows.
This is a worrying sign for the euro area economy, as it suggests that households are increasingly worried about their futures, especially if the economic environment worsens further. The situation is exacerbated by a tightening credit environment, which has resulted in higher borrowing costs for households and firms alike.
While banks have been well-capitalised to cope with a challenging financial environment over recent years, their resilience has been challenged by deteriorating economic conditions and rising inflationary pressures. This is especially true given the lingering effects of the conflict in Ukraine and the rising costs of importing oil, both of which are straining their balance sheets and capital positions.
As a result, there is a high risk of a financial panic that could lead to further financial volatility and risk premia in global markets. This could further dampen consumer spending, which would be a negative driver of the European economy.
On the other hand, if monetary policy remains accommodative, there is still a significant chance of economic growth picking up again in the future. However, this is unlikely to happen in the near term, as the economic outlook is likely to remain weak, mainly due to the impact of Russia’s energy sector sanctions.
The ECB is expected to raise its key interest rate by a quarter point in February and a further hike in September. It will then be in a position to tackle inflation and support the currency further. In addition, the ECB will have to deal with higher costs and a growing debt burden that the European Union has placed on its member states. This is why the ECB needs to be flexible in its approach, as it must maintain a balance between achieving its mandate and maintaining monetary stability. Consequently, a slowdown in the European economy will make it harder for the ECB to achieve its mandate and will also have a pronounced impact on the currency.
