The Euro-to-Dollar Rate Finds Support after Eurozone Dodges GDP Downgrade

© Christian Müller, Adobe Stock

- EUR arrests decline after bloc dodges Eurostat growth downgrade.

- But economy is slowing rapidly and the risk of a recession remains.

- EUR outlook still steeped in uncertainty given threats around corner.

The Euro drew a supportive bid from the market in mid-morning trading Thursday after official data showed the single currency block dodging a downgrade of earlier estimates of GDP growth and the German economy avoiding recession in the final quarter last year. 

Europe's single currency arrested and then reversed an earlier decline Thursday morning after Eurostat said the bloc's economy grew by 0.2% during the final quarter of 2018, confirming the initial estimate published in January, when many economists had feared the number would be downgraded to 0.1%. 

This came hard on the heels of earlier data suggesting the German economy stalled during the final quarter of the year, with 0% growth, and although that was beneath the consensus for a reading of 0.1% many analysts had feared the economy may have entered recession. 

"The poor German GDP headline earlier this morning was warning about a downward revision, but the EZ headline just about held on to its 0.2% growth rate, thanks to strong growth in a number of the smaller economies. We caution, however, that a downward revision is still a risk once the Irish data are fully incorporated," says Claus Vistesen, chief Eurozone economist at Pantheon Macroeconomics. 

Thursday's date means the Eurozone economy grew by 1.8% in 2018, down from 2.4% the previous year, while the European Commission recently forecast the economy will grow by just 1.3% in 2019. 

Quarterly growth rates in the Germany and the Eurozone fell by more than half throughout the 2018 year, from 0.7% at the end of 2017 to the 0.2% seen in the final three months of last year. 

"The weakness of the economy in Q4 cannot be attributed to the supposedly-temporary problems in the auto sector given that we already know that vehicle production edged up in the last three months of the year," says Andrew Kenningham, chief Europe economist at Capital Economics. "We are still forecasting GDP growth of 1.0% in Germany this year, but there are significant downside risks to this forecast."

A steep downturn in the industrial sector was seen behind the decline, which accelerated in the third quarter, as EU rules governing measurement of car emissions outputs brought production in the automotive sector to a standstill. 

External demand for goods manufactured in the Eurozone has also fallen sharply due to economic weakness in China and the UK, while domestic demand has grown at uninspiring rates that were not sufficient enough to offset the fall in industrial activity. 

There is one more estimate of Eurozone GDP still to come in March that could yet see growth downgraded once all of the individual country data is available for Eurostat to take into account. 

"The euro’s recent downward momentum has been driven primarily by evidence of more acute economic weakness in the euro-zone," says Lee Hardman, a currency analyst at MUFG. "Negative sentiment towards the euro has been reinforced further been by a pick-up in political uncertainty in the euro-zone."

Above: Euro-to-Dollar rate shown at daily intervals.

The Euro-to-Dollar rate was quoted 0.10% higher at 1.1275 Thursday but has now declined -1.6% so far in 2019, after falling by around 5% last year. 

"EUR/USD has closed below 1.1270/67, these are major supports," says Karen Jones, head of technical analysis at Commerzbank. "It is on the defensive and will have to regain 1.1342 to alleviate immediate downside pressure."

Jones says the shift below "major supports" was not a convincing one and that, for now, she still favours an eventual recovery by the exchange rate up to the 1.1531 area that coincides with a 200-day moving-average. But if the Euro does not make it back above 1.1343 soon, that idea could go out the window. 

"EUR/GBP continues to consolidate around the 38.2% retracement at .8810. Currently the market remains in upside corrective mode and we are unable to rule out gains to .8840/90 where we look for signs of failure," Jones says, of the Euro-to-Pound rate. 

The Euro-to-Pound rate was 0.26% higher at 0.8786 Thursday but has fallen -2.28% so far this year.

Jones says the EUR/GBP rate could fall to 0.8620 during the next one-to-three weeks.

Above: Euro-to-Pound rate shown at daily intervals.

The Euro outlook remains steeped in uncertainty as Thursday's data has done little to dispel the notion in markets that Europe's economy is slowing fast and at a time when there are still plenty of challenges lurking around the corner. 

It's not yet certain the negotiations aimed at ending the trade war between the U.S. and China, which has hurt Europe's economy, will be succesful and there's still a risk that the White House will simply turn its attention toward Europe once it's done with China. 

The trade saga could come to a head just as politicians are in the final throes of the thrashing out the UK's exit from the EU and as the political union stands on the verge of a potentially-destabilising set of EU parliamentary elections. 

All of this matters for GDP growth and inflation in 2019 and beyond, which are highly important for the European Central Bank (ECB) interest rate outlook. It's ECB policy that currency traders really care about. 

Interest rate decisions are normally only made in response to changes in the inflation outlook but impact currencies because of the push and pull influence they have over international capital flows and their allure for traders. 

The ECB has acknowledged that risks to the economic outlook are now tilted to the downside and hinted strongly that it may be 2020 before the bank is able to lift its interest rate from current record low levels, when only a few short months ago markets were anticipating a hike after the summer of 2019.

The ECB's interest rate is still at 0% and its deposit rate is at -0.4%, meaning it costs banks to deposit money at the ECB rather than paying them. 

An improvement in the interest rate outlook will require a pick up in economic growth and for core inflation to show consistent signs of making a sustainable return toward its target of "close to but below 2%". 

But with May's elections for the European Union parliament expected to enfranchise a large and potentially policy-blocking contingent of anti-Euro, anti-austerity and anti-integrationist lawmakers, it's not yet clear that even a pick up in inflation would be enough to meaningfully lift the Euro for now.

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