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What’s next for the Euro?

Euro performance depends on German and Chinese economic moves

March 2020

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Germany’s economic performance has a major impact on the way the Eurozone is performing, and the recent downturn continues to affect the euro.

The Q4 GDP data from Germany showed the economy had 0.0% growth in the fourth quarter of 2019. This comes as the Eurozone growth in the same quarter was just 0.1%1. This is not good news, especially as the coronavirus starts to hit world markets, reducing the demand for European exports to China.

There is a chance the recent dip has reached the bottom now that US-China trade tensions appear to be easing. But the German economy as a whole grew by just 0.6% last year, the lowest growth in six years2. So, Europe could be in for a rocky Q1 this year.

European Central Bank may be forced to act, pushing euro south

If Germany’s data does not bode well for the EU, as is likely, then the European Central Bank (ECB) will probably continue with its policy of Quantitative Easing3 or even increase its use, along with keeping interest rates in the EU at a record low, with possibilities of cutting interest rates even further.

Although Germany’s economy is a key cog in the economic health of the EU as a whole, there is a lot more to the EU than that. The official exit of the UK from the EU and the ensuing trade negotiations up to the end of the transition period on December 31, 2020 could also affect the euro.

One of the first pivotal dates for the in these Brexit trade discussions is the EU Summit in June, as any extension to the transition period, currently ending on December 31, may be agreed between the two sides by July4 under the Withdrawal Agreement.

Chinese currency moves and the US election

Germany’s car exports have been hit hard by moves from the People’s Bank of China to reduce the value of the Chinese yuan to offset tariffs imposed by the US, a position which could begin to improve considerably if the phase one agreement between the US and China leads to further thaws in the trade war. With President Trump having faced impeachment during an election year, it remains to be seen how this will play out since the trade war could provide good political capital later in the year for the President as he looks for a second term.

1 https://www.theguardian.com/business/live/2020/feb/14/german-economy-stagnates-growth-eurozone-gdp-business-live
2 https://www.wsj.com/articles/german-growth-falls-to-six-year-low-hit-by-manufacturing-recession-11579086072
3 Qualitative Easing: Quantitative easing is a tool that central banks use to inject money into the economy. It involves creating physical or digital money which is then used to buy government or corporate bonds as a way to stimulate spending and growth.
4 https://www.telegraph.co.uk/politics/0/brexit-transition-period-2020

This is an excerpt from the OFX Currency Outlook. Download the full report for expert commentary on current global events and their potential impact on key currencies including the pound, euro, AU dollar and US dollar.

In October 2020, the drivers of the currency market are likely to be:

  • Overall market risk sentiment. News around the resolution or continued threat of events contributing to economic uncertainty globally, including the Evergrande crisis in China and the US debit ceiling
  • High inflation and low unemployment data, which could create urgency for central banks to increase interest rates
  • Commentary from central banks around how, and when, they might change monetary policy
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