No Significant Euro Recovery Until Eurozone Growth Rebounds: Analyst

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- Eurozone growth forecasts cut by Brussels

- Euro under pressure amidst signs Eurozone economy is slowing

- Euro won't recovery until growth picks up: UniCredit

The Euro retreated Thursday after the U.S. Dollar staged a comeback from Wednesday's lows and the European Commission cuts it forecasts for growth in the Eurozone over coming years, citing what are mainly external factors.

The cuts to growth come at a time of slowing Eurozone growth with both surveys and official data confirming the area is seeing a slowdown in activity which could help explain the single-currencies under performance of late.

"Growth in the euro area is forecast to ease from a 10-year high of 2.4% in 2017 to 2.1% in 2018 before moderating further to 1.9% in 2019 and 1.7% in 2020. The same pattern is expected for the EU27," the European Commission says.

The Commission had forecast GDP growth of 2.1% for 2018, 2.0% for 2019 and 1.7% in 2020, back in the summer, but it now fears that domestic and external headwinds could weigh on the bloc's economy going forward.

Euro underperforms alongside slowdown in Eurozone growth

Above: The Euro is the worst-performing major currency of the past month, a trend that coincides with an unexpected slowdown in area growth.

The outlook for Eurozone growth is clouded by fears world trade growth could fading in light of uncertainty over the global economic outlook, brought about by President Donald Trump's "trade war" with China and his previous skirmishes with E.U. officials.

Added to that, oil prices have risen by a double-digit number in 2018, which has stoked inflation and will depress real GDP growth if there is no concurrent pickup in underlying activity. 

And all the while, domestic activity growth is set to weaken as labour market recoveries across the bloc moderate and "supply side constraints in certain member states" begin to bite. 

"Within the E.U., doubts about the quality and sustainability of public finances in highly indebted Member States could spill over to domestic banking sectors, raising financial stability concerns and weighing on economic activity," says the European Commission.

And, risks related to the outcome of the Brexit negotiations are cited as factors clouding the outlook.

"With the U.S. trade tensions likely to dominate the medium-term picture, and following the recent deterioration of eurozone PMIs, we think a convincing rebound in sentiment surveys would probably be needed for EUR/USD to stage a significant recovery," says Kathrin Goretzki, a strategist at UniCredit Bank

Above: Euro-to-Dollar rate in 2018.

The Euro-to-Dollar rate was quoted 0.10% lower at 1.1419 Thursday and has declined -4.7% for the 2018 year as a whole, while the Euro-to-Pound rate was 0.02% lower at 0.8707 and has fallen 1.5% this year. 

Above: Euro-to-Pound rate in 2018.

The Commission said the E.U. economy is facing a "very high level of uncertainty" because of U.S. trade policy and the E.U.'s exposure to developments on global markets.

It also warned there is a risk of an abrupt end to President Donald Trumps' fiscal stimulus in 2020, which could dent the U.S. economy and have a spillover impact on the E.U. There is another U.S. presidential election in 2020.

Thursday's forecasts came alongside the November monetary policy bulletin from the European Central Bank (ECB), which showed policymakers are yet to be spooked by the slowdown in Eurozone economic growth.

"Some recent sector-specific developments are having an impact on the near-term growth profile. The ECB’s monetary policy measures continue to underpin domestic demand," the ECB says, in an apparent nod to a poor third-quarter economic performance. "In addition, the expansion in global activity is expected to continue supporting euro area exports, though at a slower pace."

The ECB said in October it will keep interest rates at their record low and negative levels "at least through the summer of 2019" but that it would continue with plans to stop buying European government bonds in December.

This will bring an end to the 2015 quantitative easing programme that was launched in an effort to return inflation to target levels by stimulating the economy with low market-interest rates. 

ECB officials justified the decision with inflation forecasts that show the consumer price index and other measures of inflation making a sustainable return to the target of "close to but below 2%".

That is important because the single currency's appeal to investors is hinged upon the ECB eventually returning its interest rates to more normal levels. 

"We see risks skewed towards further downward pressure on EUR-USD, given that the global risk picture is currently not favourable for the euro and there is still room for some widening of US-EU rate differentials at the short end of the curve, as the Fed continues to raise rates and the ECB’s normalization process will be very gradual," says UniCredit's Goretzki.

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