The Euro Exchange Rate Outlook Brighter as the Eurozone Economy Strengthens
- Written by: Gary Howes
Eurozone-based companies have seen a strong earnings season pass as the effects of a weaker euro exchange rate provides a boost.
Those watching the euro exchange rate complex will be questioning how long the now well-entrenched downtrend will last.
For us the bigger picture remains firmly fixed on economic fundamentals. This should be obvious, but too often currency watchers get bogged down in small issues that have a greater-than-necessary importance attached.
Greece is a prime example of such a warped approach to the euro - the Greek economy is tiny accounting for less than 2% of eurozone GDP and is unlikely to put material downward pressure on eurozone activity.
An improving economic growth profile for the Eurozone is then the single most important risk to the euro exchange rate’s downward trend.
Since the post-payrolls low of USD1.0856, the EUR/USD has climbed almost 3 cents and at one point printed on a 1.12 big figure for the first time since 10 July.
Shorter-term the 1.10 level could form support to any weakness in the currency pair, a break below here could well entertain a fall towards 1.08 which forms a longer-term and more solid base for the shared currency.
With regards to the pound / euro exchange rate 1.40 is the base to watch. We get the sense now that the period of recent sterling weakness is drawing to a close and a gradual climb higher could occur.
Latest Pound/Euro Exchange Rates
  | Live: 1.146▲ + 0.15%12 Month Best:1.2162 |
*Your Bank's Retail Rate
| 1.107 - 1.1116 |
**Independent Specialist | 1.13 - 1.1345 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
The Outlook is Bright say UniCredit
We are watching the direction in the Eurozone’s economic growth profile to try and determine a suitable spot to call the bottom in the euro’s trek lower.
Eurozone economic growth slowed to 0.3% qoq in 2Q15, slightly weaker than expected.
Despite this slowdown, Marco Valli, Chief Eurozone Economist at UniCredit Research in Milan has struck a particularly upbeat tone on the Eurozone’s outlook which we have taken note of:
“The deceleration from the first quarter does not reflect fundamental drivers, but volatility in quarterly data due to temporary factors.
“The underlying trend remains healthy and we expect economic growth to reaccelerate to a 2% annualized pace in 2H15. In a context of resilient domestic demand, Chinese and Greek woes are very unlikely to derail the eurozone recovery. Our 1.4% GDP forecast for this year remains well on track.”
In the first quarter of 2015 the EZ economy grew 0.4%.
At the country level, Germany reported 0.4% qoq growth, French GDP came in flat, while Italy expanded by 0.2%. Once again, Spain was the best performer among the largest countries, with whopping 1.0% qoq growth.
The eurozone growth slowdown in 2Q is not concerning says Valli:
“All the most informative business surveys remain at comfortable levels and still on an upward trend, and we seriously doubt that China and/or Greece may pose a meaningful threat going forward.
“The only channel through which these two countries may dent the eurozone recovery is via protracted disruption in financial markets, which we regard as highly unlikely.
“With most of the developed world growing at reasonable pace and the bulk of past euro depreciation set to feed through in 2H15, growth prospects in the eurozone remain favorable.
“We are comfortable with our view that economic activity will pick up momentum in the second half of the year, expanding at a pace of about 2% annualized.”
If this is forecast on GDP performance is correct does it mean the euro exchange rate complex will also start delivering upside moves in the second half of the year?
Eurozone Companies Benefit from Weak Euro
Eurozone-based companies have seen a strong earnings season pass as the effects of a weaker euro exchange rate provides a boost.
Barclays say, "a weaker euro was certainly an important factor in Q2. A basket of fifty internationally exposed stocks beat EPS estimates by a margin of 6.0%, and grew earnings by 8% year-on-year in Q2. However the dominant driver of the earnings beat in Q2, we think, was the recovery in the European end markets.
"This is because a basket of domestically focused stocks managed to beat EPS estimates by an even greater margin of 7.8%, and grew earnings by 39% year-on year."
The message - the outlook in Europe is turning brighter and those with longer-term FX requirements should take note.
