Today’s
session has seen some nasty eurozone growth data emerge, which has put the euro
under even more selling pressure. Yesterday’s was a tough enough session for
the single currency thanks to Moody’s credit downgrade to five Spanish regions;
sterling/euro has helped itself to some very welcome gains again today.
Attention as
far as the euro has been concerned has been focused on Spain’s “imminent”
bailout request and Greece’s slow progress towards an agreement on further
austerity measures that will unlock the next tranche of aid. Focus switched back
to economic fundamentals today, which is not an environment in which the euro
has thrived in recent months thanks to the regional downturn in economic
growth. Brutal austerity measures throughout the eurozone periphery are not
just hurting those struggling economies, the weakening demand is hitting the
eurozone’s core, as shown by today’s German and French growth data.
September’s
German manufacturing data suggested the weakness we have seen in the sector this
year had bottomed out but October’s downturn casts a shadow over this theory.
France’s manufacturing number came in below expectations, as did that of the
German services sector.
A key gauge
of the German business climate showed a sixth consecutive monthly decline,
giving its worst showing since March 2010. What is interesting is that Ifo, the
institute which produces the business climate survey, does not see any need for
the European Central Bank to cut interest rates and does not see Germany
heading into recession.
We are
rather more bearish on the prospects of the European powerhouse. The composite
measure of eurozone output has fallen to a 40-month low and points to an even
sharper contraction in Q4 compared with Q3. Germany’s resilience to the
eurozone region’s decline is a thing of the past and we are expecting a rate
cut from the ECB in the coming months. The ECB might be doing its bit to ease
concerns over eurozone contagion and a break-up, but growth in the region is
crying out for help.
Richard Driver
Currency Analyst
Caxton FX
