Monday, January 28, 2019

The Euro, Further Downside Ahead

  • Euro
  • European Central Bank

It is apparent from Draghi’s speech last Thursday that the ECB’s economic risk outlook has moved from "broadly balanced between better and worse outcomes” to "moved to the downside". The “broadly balanced” statement was released within the ECB’S December meeting minutes since the ECB at that time believed that the series of weak economic data released in the last 6 months of 2018 represented only a short-term economic slowdown in the Euro bloc.

On Thursday, that all changed as the ECB altered its view, which was forced by the weak data released during this month. Most notably, IHS Markit’s Flash Composite Purchasing Managers’ Index dropped to 50.7 relative to December’s reading of 51.1. Even worse, the 50.7 number is the lowest since July 2013. Note that the European PMI is now only slightly above the 50 mark that divides growth from contraction.

Furthermore, latest figures also showed that Manufacturing activity in Germany, the bloc’s largest economy, shrunk for the first time in four years. IHS’s concern now is that the manufacturing slump might spread out and effect the services industry. Even more daunting, recent data showed that German exports in 2018 experienced its weakest growth rate in five years.

Above is only a few of the several troublesome economic data coming from the EU. Now, the ECB is locked in defensive mode and Draghi made that clear on Thursday when he said that the central bank was ready "to adjust all of its instruments". He even said that several policymakers recommended that the ECB should use its targeted longer-term refinancing operations tool in order to maintain cheap credit in the economy.

Finally, what does all that mean for the Single currency? The fact that the ECB has raised the alarm over the zone’s economic future is in itself bearish for the Euro. Moreover, the weak economic data experienced this month are set to continue in this trend dragging the Euro lower with it. To strengthen the earlier point, Draghi made it clear on Thursday when he said that “the slowdown was showing signs of becoming long-lasting because of global trade tensions, Brexit and financial market volatility.”