Euro Currency Report September - CPI update
Derbyshire, UK – September 21, 2023: A review of the Euro-Area’s monetary policy, macroeconomics and geopolitical situations suggests that the euro could have some weakness although may stage a recovery if inflation continues to moderate and the labour market remains strong. The next update is planned to be published after the EA CPI report on Tuesday, September 29th or before if any significant event occurs.
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Monetary Policy
The sentiment regarding monetary policy could apply some upward support to the value of the euro as the ECB are hawkish on inflation although a recession risk is a headwind.
The European Central Bank (ECB) Governing Council
Sources: European Central Bank, Macroeconomic Projections, Trading Economics, FXStreet
In the Euro Area, the benchmark interest rate is set by six members of the Governing Council plus nineteen governors from the national central banks of the countries using the euro.
The September meeting saw a 0.25% hike of the Main Refinancing Operations rate setting it at 4.50% which is up from 4.20% and the 0.25% hike in July. Markets were expecting a hold.
The latest rate now matches the Trading Economics Q3 ‘23 forecast of 4.50% which they also identify as the peak.
Over the previous three years, since the start of 2020, the interest rate has been trending up with a low of 0.00% and a high of 4.50%. Over the previous six months, the rate has continued to climb.
The next meeting is due on Thursday, October 26th.
The Governing Councils September statement summarised:
Rates raised by 25 basis points to combat high inflation
Inflation is still expected to remain too high for too long
Past rate increases are continuing to be transmitted forcefully
Committed to bringing inflation back to target, even if it means slower economic growth.
Macroeconomic Projections
The Governing Council revised its macroeconomic projections at their September meeting. They will update them again in December.
The short-term outlook for growth in the euro area has deteriorated, with GDP growth expected to slow down from 3.4% in 2022 to 0.7% in 2023.
Growth is expected to pick up in 2024 and 2025, but will remain below the pre-pandemic trend.
Inflation is projected to continue to decline over the projection horizon, reaching the ECB's target of 2% in the third quarter of 2025.
ECONOMIC DATA
The sentiment regarding economic data could apply some downward pressure to the value of the euro as the economic growth is slowing. However, this could be eased by the slowing inflation rate and improving labour market.
Economic Growth in the Euro Area
Sources: Eurostat, Trading Economics, FXStreet
Euro Area GDP Growth Rate is published by Eurostat and shows the change in the inflation-adjusted value of all goods and services produced by the economy.
Economic growth in the Euro Area slowed to 0.10% in Q2 2023, below the consensus of 0.3% and the Q1 2023 growth rate of 0.10%. This is the weakest growth rate since Q4 2022.
The ECB projects the annual growth rate to be 0.70% by the end of 2023. This is achievable, but there are a number of risks, including the ongoing war in Ukraine, high inflation, and the recent slowdown in economic growth. The Trading Economics forecast for a quarterly growth rate of 0.40% in Q3 is slightly higher than the recent trend, which is a positive sign. However, it is too early to say whether the Euro Area economy is headed for a recovery.
The next GDP Growth rate report by Eurostat is due on October 31, 2023.
Inflation in the Euro Area
Sources: Eurostat, Trading Economics, FXStreet
Euro Area inflation is published by Eurostat and is calculated using a weighted average of the Harmonised Index of Consumer Price (HICP). The HICP is a basket of goods and services that are commonly purchased by households, and its weight reflects the relative importance of different goods and services in the household budget.
The annual CPI rate in the Euro Area in August 2023 was 5.20%. This is slightly lower than the consensus of 5.30%, and also lower than the July 2023 data of 5.30%. However, it is still higher than the average of the previous nine data points, which was 7.88%.
The ECB's projection of an annual CPI rate of 5.60% by the end of 2023 is achievable, but it depends on a number of factors, including the success of their monetary policy and the evolution of the global economy. The recent moderation in inflation could be temporary, as there are a number of factors that could keep inflation high in the coming months.
The next CPI rate report by Eurostat is due on September 29, 2023.
Labour in the Euro Area
Sources: Eurostat, Trading Economics, FXStreet
Euro Area unemployment is published by Eurostat and is a measure of the number of people actively looking for a job as a percentage of the labour force.
The unemployment rate in the Euro Area in July 2023 was 6.40%, which is in line with the consensus of 6.4%. It is also the same as the unemployment rate in June 2023. The unemployment rate has been trending downwards over the past 9 months, with an average unemployment rate of 6.53%. This suggests that the labour market in the Euro Area is improving.
Trading Economics forecasts the unemployment rate to be 6.60% in September 2023. However, based on the recent trend, it is more likely to be lower than that.
The next unemployment rate report by Eurostat is due on October 2, 2023.
Market Influences
The sentiment regarding market influences could apply some volatility to the value of the euro as there is much uncertainty surrounding the Russia-Gas dispute and the war in Ukraine.
Russia–EU gas dispute
The 2022–2023 Russia–European Union gas dispute is a conflict between Russia and the European Union over the supply of natural gas. The dispute began in February 2022, when Russia invaded Ukraine. Russia has since demanded that European buyers pay for gas in rubles, and has reduced the flow of gas to Europe. The European Union has responded by trying to reduce its reliance on Russian gas, and has imposed sanctions on Russia.
In September 2022, Russian gas was still flowing to Europe via Ukraine, but at a reduced rate. Europe has been importing record volumes of liquefied natural gas from Russia, and has also been seeking to increase its imports from other countries, such as Norway and Qatar.
The dispute is likely to have a significant impact on the value of the euro. A weaker euro would make Russian gas more expensive for European buyers. However, the impact on the euro is difficult to predict, as it will depend on a number of factors, including the outcome of the dispute and the overall state of the global economy.
Overall, the 2022–2023 Russia–European Union gas dispute is a complex issue with a number of potential consequences. The impact on the value of the euro is uncertain, but it is likely to be significant.
Russian Invasion of Ukraine
On February 24, 2022, Russia launched a full-scale invasion of Ukraine, the largest military conflict in Europe since World War II. The invasion was widely condemned by the international community, and many countries imposed severe sanctions on Russia.
The war has had a devastating impact on Ukraine. Millions of people have been displaced from their homes, and thousands have been killed. The war has also caused a global food crisis, as Ukraine is a major exporter of wheat and other agricultural products.
In recent months, the war has become a grinding stalemate. Russian forces have made some gains in the eastern Donbas region, but they have been unable to achieve a decisive victory. Ukraine has mounted a fierce resistance, and it has received significant military and financial assistance from the West.
On September 19, 2022, Russian President Vladimir Putin announced a partial mobilisation of the Russian military. The move has been seen as a sign that Putin is struggling to achieve his objectives in Ukraine.
The war in Ukraine is having a significant impact on the global economy, and it is likely to continue to do so for some time. The war has caused energy prices to rise, which is putting upward pressure on inflation in Europe. The war is also disrupting supply chains and causing uncertainty in the business community.
Gavin Pearson
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