The euro hit a new two-decade low on Tuesday, hit by renewed concerns that energy prices are keeping inflation high and weak economic data.
Euro zone business activity contracted for the second consecutive month in August as the cost-of-living crisis forced consumers to cut spending while supply constraints hurt manufacturers, according to the composite index. purchasing managers (PMI).
Although the PMI for business activity in Europe was not as bad as feared, analysts said there was likely to be more gloomy news for the economy as gas prices rose to record highs ahead of winter.
The euro was trading at $0.9920 and is expected to fall further to $0.9600 in December, given Europe’s worsening outlook, said Monica Defend, director of the Amundi Institute. “The United States and the euro zone are on different paths,” he said.
“The euro is depreciating again, with a high possibility of falling below parity, due to the low margin of maneuver of the European Central Bank (ECB) to raise interest rates,” said Gabriela Siller, director of economic-financial analysis at Banco Base , who sees the possibility of the currency depreciating to 0.90 per dollar. “There is a lot of speculation against the euro.”
The ECB cannot keep up with the Fed for two reasons: the eurozone did not lower interest rates in 2020 and raising the rate would further slow down its economy, the specialist explained.
Other currencies such as the British pound recovered some ground after the PMI data, but were not far from a two-and-a-half year low hit earlier at $1.1718.
“Renewed concern about Europe after rising gas prices is the main reason for the euro’s decline,” said Holger Schmieding, chief economist at Berenberg.
Benchmark gas prices in the European Union soared 13% overnight to an all-time high, having doubled in just one month to 14 times the average of the past decade.
“I don’t see the Ukraine war going to end any time soon, that would be the catalyst for a market rally. That’s going to keep the pressure on energy prices and as for the euro, the only way is down.” said Michael Hewson, head of markets at CMC Markets.
Russia will cut off natural gas supplies to Europe via the Nord Stream 1 pipeline for three days at the end of the month, the latest reminder of the precarious state of the continent’s energy supply.
“The sanctions against Russia have come back like a boomerang because of the high cost of energy and the caution that exists. I don’t think they will give in and the consequences will be serious,” Siller said.
European stocks fall to a one-month low
European stocks fell on Tuesday, extending their losing streak to a third straight session, after data showed business activity in the region contracted this month.
The pan-European STOXX 600 index fell 0.4% to its lowest level in almost a month.
In Germany, the slowdown deepened in August as companies saw demand weaken due to high inflation, rising interest rates and economic uncertainty.
Elsewhere, the manufacturing index rose to 49.8 in August from 49.3 the previous month, beating analysts’ forecasts of 48.2. The German DAX was down 0.3% after the data.
“It’s been another bad economic day for European markets, with the latest manufacturing PMI numbers falling into contraction territory for Germany, France and the UK,” said Michael Hewson, chief market analyst at CMC Markets.
However, Hewson pointed out that, although the economic data has been poor, the reaction of the markets has been somewhat more ambivalent.
With information from Reuters