There were more than a few shocks and surprises to unnerve investors, notably the attempted coup in Turkey and the International Monetary Fund’s downgrade of its forecasts for global growth. Investors had to choose between the euro’s safe-haven qualities and its unwilling involvement in the Brexit showdown. They really could not make up their minds so the euro was on average just about unchanged against the other dozen most actively-traded currencies. It strengthened by three quarters of a cent against sterling and lost one US cent.
The International Monetary Fund published its World Economic Outlook UPDATE on Tuesday afternoon, entitled “Uncertainty in the Aftermath of the U.K. Referendum”. As a result of the vote “the global outlook for 2016-17 has worsened”. The update notes that “Among advanced economies, the United Kingdom experienced the largest downward revision in forecasted growth”, which is now estimated at 1.7% for the currency year and 1.3% in 2017. The equivalent numbers for Euroland were 1.6% and 1.4%.
Those numbers suggest cumulative growth over the two years will be identical (3.02%) in the UK and the €Z. Investors recognised this in their treatment of the euro and the pound, selling both against the dollar with only a third of a cent to separate them. The case against starling might have been more compelling because of the greater uncertainty but the euro was also hurt by sharp falls for investor sentiment in Germany and Euroland.
On Thursday the European Central Bank confirmed there would be no change in euro monetary policy. The ECB president reminded the world that, if it became necessary, the bank would use “all instruments at its disposal” to get inflation up to 2% and boost growth. However, investors were not scared into selling the euro, even though Sig. Draghi would love them to do exactly that.
The flash Eurozone composite purchasing managers’ index fell less than expected in July. The PMI slipped to 52.9 from 53.1 in June, hitting an 18-month low but better than expectations for a reading of 52.5. The services PMI came in at 52.7, down from 52.8 in June, also marking an 18-month low but ahead of expectations of 52.5. Meanwhile, the manufacturing PMI nudged down to 51.9 in July from 52.8 the previous month. This marked a two-month low and was a touch below the expected reading of 52.0.
The Eurozone economy is demonstrating surprising resilience in the face of the UK’s vote to leave the EU and another terrorist attack in France. The overall rate of economic growth is largely unchanged, suggesting GDP is growing at a sluggish but reasonably steady annual rate of around 1.5%.
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