The euro had a tough week, losing three cents to the US dollar and nearly a cent to the pound. After several weeks of positive progress the euro ran into a wall on Thursday when statistics showed unemployment at a record high of 12.2% and inflation falling off a cliff at 0.7%. Investors suddenly clicked that the European Central Bank (ECB) was worrying about the wrong thing; inflation instead of deflation. They looked at the monetary stimulus being cranked out by the central banks in Japan and the States, where unemployment is appreciably lower and inflation is above 1%, and wondered how long it would be before the ECB had to lower its benchmark “refinancing” interest rate.
Additionally, Monday morning’s round of euro zone manufacturing sector purchasing managers’ index (PMI) readings was slightly unhelpful to the euro: Spain, Italy, Germany and pan-Euroland all delivered positive figures between 50.7 and 51.7 but France spoiled it with a 49.1 (anything over 50 implies growth and under 50 implies contraction).
The ECB meets on Thursday but no change in interest rates is expected. Markets will be looking for any indications of possible future ECB policy easing and ECB President, Mario Draghi, is likely to face questions on currency economic conditions. The EUR is looking weak against Sterling which has been supported by the improving UK economy.
By contrast the dollar had a good week, strengthening by three cents against the euro and by two and a half against the pound. After its six-weekly monetary policy meeting the Federal Reserve surprised investors by not hinting at a delay to the end of its $85bn-a-month stimulus programme. They decided this must leave the door open to the wind-down beginning before the end of the year. Friday’s stronger-than-expected purchasing managers’ index helped feed that notion.
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