EUR Outlook and Strategy

Published on - 5th March 2024

Navigating The EURO Landscape: Key Insights

  • Weakening economy, Manufacturing Woes and Struggling Business Activity – The Euro Area economy stagnated, as persistently high inflation, record borrowing costs, and weak external demand continued to exert downward pressure on growth. The manufacturing Purchasing Managers’ Index (PMI) plunges to 42.3, accentuating the downturn, while overall business activity sees a decline to 46.1. Retail sales add to the concerns by decreasing by 0.4%, underscoring the broader struggle with weak demand, high interest rates, and the repercussions of the energy crisis.

  • Glimmer of Hope for Germany’s Recovery – Despite these challenges, a ray of hope emerges as rising real wages and a robust labor market are anticipated to contribute to Germany’s recovery in 2024. However, the shadow of a potential recession looms, following a 0.3% output shrink in Q4 2023.

  • Trade Dynamics: A Shifting Landscape – In the broader Eurozone context, the trade surplus undergoes a significant shift, turning into a €16.8 billion surplus in December 2023 compared to a deficit of €8.5 billion in the previous year. A notable decline in imports by 18.7%, primarily in energy products, raw materials, and machinery & vehicles, contrasts with relatively stable exports, buoyed by increases in machinery & vehicles.

  • Weaking Housing sector – Recent data reveals escalating challenges, marked by rising pressure on liquidity, softer investment metrics, squeezed profitability, and higher interest rates. This economic strain extends to the real estate sector, with declining demand for office space and decreased housing affordability. The outlook for house prices softens, heightening the risk of bankruptcy and potential spillover to the financial sector.

  • Preliminary Fiscal Reform: A Eurozone Response – The Eurozone initiated preliminary steps toward fiscal reform, aiming to reduce debt and guide investments. This agreement targets nations with debt over 60% of GDP or a deficit above 3%, introducing flexibility, safeguards, and member state control over public finances.

  • ECB’s Liquidity Reduction: Impact on Borrowing Costs – However, the European Central Bank’s (ECB) liquidity reduction raises concerns over increased borrowing costs across Europe. Rates on both secured and unsecured bases are expected to rise as the ECB reverses years of easy monetary policy.

  • ECB divided on Monetary Policy – Divergent perspectives emerge regarding the ECB’s future rate cuts. Some favor June and others lean towards April. Hawks emphasize caution against premature rate cuts, citing inflation risks and the need for a stable return to the 2% inflation target. In contrast, dovish members argue for sooner cuts, citing disinflation and fears of undershooting the inflation target.

  • Euro vs USD Dynamics: The Current and Future Outlook – In light of the contrasting growth dynamics, the ECB is urged to be more dovish than the USA. However, the ECB’s approach is perceived as more austere and slower than the Federal Reserve. Currently, the Euro is supported by a dovish Fed leading to USD weakness. The stark reality unfolds – the EU faces a recessionary scenario, while the US economy stands stronger. The evolving Central Bankers’ stance may compel the EU to make more cuts than the Fed, potentially resulting in a weakening Euro against the USD, with a direction towards 1.02 for EURUSD.

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