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What are the key factors that can keep the Euro under pressure for some time?

2024-10-24 09:56:34Biznes SHKRUAR NGA REDAKSIA VOX

What are the key factors that can keep the Euro under pressure for some time?

The euro continued to fall against other major currencies after the IMF downgraded the eurozone's economic growth outlook. Over the past month, the currency has fallen more than 3% against the US dollar, falling below 1.08, the lowest level since August 2.

The euro has also weakened against the British pound, Swiss franc and Australian dollar by 0.77%, 1.47% and 1.54% respectively over the same period. Below-target headline inflation, continued economic weakness and political uncertainty have all contributed to a soft euro. Typically, the upcoming US election plays an important role in driving currency market trends.

Global market trends have been largely influenced by the upcoming US presidential election on November 5, with betting markets favoring a Donald Trump victory. Echoing a similar trend in 2016, the US dollar strengthened during Trump's presidency, largely due to the US-China "trade war". This time, the situation could get worse, as Trump has vowed to impose tariffs on Europe and other countries, raising fears of a second trade war.

Dilin Wu, a research strategist at Pepperstone, stated: "The European economy, already hit by a 10% tariff from the US and a possible slowdown in China, faces growing recession risks." If this happens, the European Central Bank (ECB) may be forced to deepen its rate cuts to keep the euro at a low level, while maintaining its competitiveness in exports.

Analysts from Deutsche Bank AG, JPMorgan Private Bank and ING Groep NV have all warned of the risk of the euro falling to parity with the US dollar if Trump is re-elected. Economists believe Trump's proposed 60% tariff on Chinese goods, along with a 10% tariff on imports from the rest of the world, would fuel price pressures in the US, prompting the Federal Reserve to raise interest rates again.

These expectations have strengthened the strength of the US dollar, further supported by the country's resilient economic data. In contrast, the eurozone's annual inflation rate fell below target to 1.8% in September, leading to the ECB's third rate cut this year. At the annual meetings of the International Monetary Fund (IMF) and the World Bank on Tuesday, ECB President Christine Lagarde reiterated that disinflation remains on track, but noted that the pace will still depend on future economic data.

However, its meeting-by-meeting approach has largely been dismissed as the IMF lowered its growth forecast for the euro zone, forecasting an expansion of 1.2% next year – down 0.3% from July's estimate. Weakness in the manufacturing sectors of Germany and Italy is seen as the biggest contributor to this slowdown.

Global government bond yields rose in October, particularly US Treasury yields, after stronger-than-expected jobs data. Bond traders now expect the Federal Reserve to slow the pace of rate cuts as the US economy appears headed for a "soft landing".

The rate-sensitive 2-year U.S. Treasury yield has risen 0.34% since the Fed implemented a 0.5% rate cut in September, supporting the U.S. dollar and putting pressure on other currencies. The euro has been one of the weakest currencies in the G-10 group over the past month, due to significantly lower eurozone government bond yields. At this time, the 10-year US Treasury yield rose 0.47% to 4.21%, hitting a three-month high.

In contrast, the main eurozone government bond yields saw only modest increases, with the 10-year bond yields of Germany, France, Spain and Italy rising by just 0.11%, 0.09%, 0.04% and 0.04% respectively. 0.01%. This reflects the much weaker outlook for economic growth in these major European countries, putting downward pressure on the common currency.


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