Euro Weakens Against U.S. Dollar Despite Euro Zone GDP Growth
By Capital Market, Business Standard
The euro edged lower against the U.S. dollar in recent trading, even after the latest data showed that the Euro Area economy expanded modestly in the third quarter. The EUR/USD currency pair declined from a two-week high recorded earlier in the session as investor sentiment weighed more heavily on monetary policy expectations, economic data revisions, and broader market trends.
Euro Area GDP Growth Revised Upward
The Eurostat, the statistical office of the European Union, released revised figures showing that the economy of the 20-nation euro area grew by 0.1 percent during the July to September quarter compared to the previous quarter. This data represented a mild upward revision from the preliminary estimate, which had indicated zero growth.
On an annual basis, the year-on-year growth rate for the third quarter was revised to 0.1 percent. The initial reading had underscored a slight 0.1 percent contraction. The improved figure shows that the region is not technically in recession, as fears of a back-to-back quarterly decline in output have been temporarily avoided.
Highlights of Revised Euro Area GDP Performance:
– Quarter-on-quarter GDP: +0.1 percent (compared to preliminary flat estimate)
– Year-on-year GDP: +0.1 percent (previously estimated at -0.1 percent)
– Notable variation in national GDP performances:
– Germany: -0.1 percent quarter-on-quarter
– Italy: 0.0 percent
– France: +0.1 percent
– Spain: +0.3 percent
The mixed national data demonstrates the uneven nature of economic recovery across euro area countries. While Spain showed relatively robust growth, Germany, the largest economy in Europe, contracted modestly, continuing its struggle with sluggish industrial activity and weak export demand.
Euro Drops Despite Economic Growth
Despite the slightly better GDP performance, the euro slipped against the dollar as traders interpreted the data as insufficient to prompt a change in the European Central Bank’s (ECB) monetary policy stance. The ECB has recently signaled caution amid persistent economic weaknesses, keeping the key interest rate unchanged at its October meeting after a series of hikes aimed at taming inflation.
The EUR/USD exchange rate dropped nearly 0.2 percent on the day, falling from an intraday high of around 1.0720 to the 1.0690 level. This reflects investor uncertainty about the strength of the Eurozone’s recovery and whether current economic momentum is enough to warrant optimism about future rate plans.
Factors Contributing to EUR/USD Decline:
– Market anticipation of more prolonged monetary tightening by the U.S. Federal Reserve compared to the European Central Bank
– Lack of upward inflationary pressure in the Eurozone that could prompt the ECB to resume rate hikes
– A stronger U.S. dollar supported by positive economic indicators in the U.S., including labor market resilience and consumer spending strength
ECB Monetary Policy Outlook
Investors remain cautious about the ECB’s next moves, viewing the recent GDP estimates as encouraging but not definitive enough to push policymakers toward a more hawkish stance. The central bank has already indicated that its current restrictive monetary policy is achieving the goal of reducing inflation, which remains above the ECB’s 2 percent target but has moderated significantly in recent months.
– Headline inflation in the Eurozone has declined from the double-digit highs witnessed in 2022.
– Core inflation, which excludes volatile food and energy prices, has also fallen but remains sticky in several key sectors.
Officials including ECB President Christine Lagarde have emphasized data dependence in decisions going forward, suggesting no immediate change in policy is expected in the December meeting unless inflation trends or real economic activity sharply deviates from current projections.
U.S. Dollar Remains Firm
Meanwhile, the U.S. dollar has continued to find support from expectations that the Federal Reserve may keep interest rates elevated for a longer duration. Strong U.S.
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