THE EURO is trying to recover today against the major currencies after a series of losses extending throughout the morning. From its lowest levels during the session, the euro was able to rise by 0.2% against the US dollar and reach the level of 1.05541 at approximately 9:15 am GMT. At the same time, the euro was able to reach its highest level against the British pound in more than ten days, reaching the level of 0.86776.
The Euro’s attempt to recover comes with more positive economic numbers from the Eurozone. We witnessed the highest reading in the ZEW Economic Sentiment Index for the Eurozone and Germany since last April, with readings of 2.3 and -1.1 for each of the two economies, respectively, for the month of October.
Institutional investors appear to be showing more confidence in the European economy’s ability to recover in the coming months with the first positive ZEW reading since April. In Germany as well, despite the negative reading of the index, it exceeded expectations at -9.3 and is still far from the previous negative readings that reached -14.7 last July.
These positive numbers came as a continuation of another series of previous data this month. Yesterday, we witnessed a surplus in the trade balance for the third month in a row, which we did not see in the year 2021, as it recorded a surplus of approximately 6.7 billion euros. The Eurozone also recorded the highest growth in industrial production since last April, with growth of 0.6% during August. While the services sector is trying to complete the recovery throughout the euro area, with better-than-expected readings of the HCOB services PMI for September. The same applies to the manufacturing sector as well, but with less shiny numbers, as the contraction in manufacturing activities in Germany continues to be more than expected.
However, expectations of continued high inflation in the United States and talk about the possibility of interest rates remaining at their high levels for a longer period than expected during the coming year, in addition to the worsening conflict in the Middle East and fears of its expansion to include other countries outside the region, may constitute the most important factors pressuring the euro, which is located close to the parity zone with the US dollar despite the positive economic numbers.
The same applies to inflation expectations in the United Kingdom. We witnessed the Bank of England’s chief economist warning of the possibility of interest rates remaining high to combat inflation. While the possibility of raising interest rates again by the central bank is not strong enough, wage growth, in addition to the continued rise in Brent crude oil and UK natural gas prices with the arrival of winter, may continue to put pressure on inflation rates.
Inflation expectations in the United States are reflected in further rises in US Treasury bond yields, although markets do not favor the possibility of the Fed raising interest rates for a final time this year. However, the spreads between bond yields across the Atlantic are rising significantly, which may put further pressure on the euro. The difference between ten-year US Treasury bond yields and their counterparts in the Eurozone reached 1.943% today, which is the highest level we have not seen since November of last year.
