EUR - Euro Quarterly Forecast

A review of the Euro's recent performance and key factors likely to affect the Euro over the next 12 months

Published: 19 January 2022

Economy

By the end of the quarter, “supply chain issues” was almost as hot a topic in Europe as it was in Britain. Markit and Ifo employed nearly identical language to point out that supply “bottlenecks” were a brake on activity. After Markit’s composite purchasing managers’ index touched a 15-year high in July, supply and cost constraints took it lower in August and September. Both manufacturing and services were impeded by shortages of inputs.

They were also affected by higher costs. Industrial producer prices increased by 1.1% in August and were up by 13.4% on the year. The highest yearly increases were 54.8% in Ireland and 23.9% in Belgium. At the consumer level, there was also upward pressure on prices. Headline inflation in the euro area hit a provisional 3.4% in September, its highest level in 13 years.

Gross domestic product expanded by 2.2% in the second quarter and was 14.3% larger a year earlier. Even after that growth, output was still 2.5% below the pre-pandemic Q4 2019.

Politics

July through September – and August in particular – are traditionally quiet months in European politics, because the protagonists are on holiday. That was very much the case in Q3 this year. Even Italy, usually a reliable provider of political excitement, was quietly getting on with Mario Draghi – the previous head of the European Central Bank – as its prime minister. In early October’s local elections, the centre-left candidates whom he represents reaped big wins in the large cities of Milan, Naples and Bologna. He now has a better chance of staying in place until the end of the legislature in March 2023. The German general election in late September was less satisfying. Germany’s electoral system is designed to avoid single-party governments, and it worked very well this time. Following the vote, there was no clearly obvious contender to replace Angela Merkel as chancellor, and more than a week later, that situation had not changed. The four main parties are now engaged in negotiations aimed at forming coalitions. Although Olaf Scholz’s Social Democrats won the most seats, he is not assured of leading the next government. Optimists hope a coalition will have been formed by Christmas.

Monetary Policy

After months of discussion, the European Central Bank announced its new monetary policy strategy. Instead of targeting an inflation rate of “close to but just below zero”, it now aims for a “symmetrical” 2% inflation rate. It will tolerate above-2% inflation to the same extent that it accepts a sub-2% rate. The change was apparently made to avoid the idea that 2% was a cap. As before, interest rates will not move higher until inflation is “sustainably” at 2%. The ECB’s Pandemic Emergency Purchase Plan (PEPP), which distributes money via a programme of quantitative easing, is under fire from the usual suspects. The central bankers of Austria, Germany and the Netherlands want to end it at the earliest opportunity. Bundesbank President Jens Weidmann reminded an interviewer that the first “P” stands for pandemic, not permanent. ECB President Christine Lagarde believes that Eurozone activity will return to pre-pandemic levels by the end of this year. She expects supply chain bottlenecks and labour shortages will subside during the first half of 2022.

EUR / USD - 12 Month Forecast

The euro has spent most of the last quarter falling against the US dollar. The combination of faster recovery and consequently higher expectations of interest rate hikes for the dollar has worked against the euro. The supply chain issues have hit the European figures as well as those of the UK. Forecasts are for the euro to stabilise and appreciate gradually against the US dollar, but this relies on the European economy and central bank catching up to others.

EUR / USD - 12 Month Forecast

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How does this impact you?

Currency market volatility could have a significant impact on your transfer costs. Hawk FX provide expert guidance to ensure you are protected and get the best rate.

Talk to us about how market volatility will affect you directly and how we can help. Complete this form or call us on +44 (0)330 380 30 30.

Quarterly Forecasts for other key currencies

GBP | United Kingdom

The UK continues to be affected by supply disruptions. Whilst the economy has continued to rebound almost to pre-pandemic levels, significant risks remain. The BoE are likely to raise rates sooner which could support sterling.

USD | United States

Rising inflation and rebounding employment and economy are pushing the Federal Reserve to reducing asset purchases this quarter. Expectations of an improving economy and increasing rates have supported the dollar.

AUD | Australia

The Australian Dollar has had a tough time, with lockdowns in Australia and reduced orders from China. Going forward, Australia seems to be coming through the worst of the disruption and the Australian Dollar could make back some ground.

NZD | New Zealand

Although New Zealand has been the least affected by lockdowns and disruption, they are now following the path of others through vaccination. The central bank is keen to normalise rates and this could further support the Kiwi.

CAD | Canada

Despite an increase in the oil and commodity prices, the loonie has not seen much benefit. The supply disruptions have outweighed oil prices and inflation remains a concern, though the central bank does not look likely to act immediately.