Struggling European currencies are facing further challenges as central banks pause interest-rate rises and economic growth remains weak. On Thursday, the pound hit a more than six-month low against the dollar, despite the Bank of England holding rates steady and vowing to raise borrowing costs again if inflation cannot be controlled. The Swiss franc, which has been one of the best-performing major currencies against the dollar this year, fell almost 1% after Switzerland unexpectedly halted its rate rise cycle. The Swedish krona also saw no relief following a quarter-point rate rise, leaving it down over 6% against the dollar in 2022. Analysts and investors warn of a bearish outlook for European currencies, citing a strong dollar and stagnant economic growth in European nations as oil prices rise.
Economists are increasingly focusing on growth rather than central bank policies, noting that the Bank of England offered mixed messages by pledging to tackle inflation while acknowledging slowing economic growth. The European Central Bank (ECB), which raised rates to a record 4% last week and upgraded its inflation forecast for 2024, has seen the euro fall almost 2% against the dollar this month. The ECB and the US Federal Reserve have both signaled that rates will remain higher for longer, but traders are concerned about the underperformance of Europe’s economy and are betting that the ECB will be forced to cut rates before the Fed.
Sweden’s central bank raised its key rate and warned of the need for further action to bring inflation down. However, the krona barely saw any improvement and remains close to a record low against the euro. Sweden’s economy is expected to contract this year due to turmoil in the real estate market. The only central bank whose hawkish tones have resonated with markets is the US Federal Reserve, which held rates steady but indicated one more rate rise this year. The dollar index, which measures the US currency against peers, is near its highest level in over six months. The US economy is also performing better than much of Western Europe, leading economists to anticipate that one of the major European central banks will be the first to cut rates.
Market expectations ahead of central bank meetings have caused volatility in currencies. Nomura predicts that the pound will weaken against the dollar by the end of October, while ING economists believe the Swedish crown remains vulnerable. Another factor driving dollar strength is the high oil prices, which are trading near 10-month highs above $90 per barrel. The US is less affected by higher oil prices due to its oil production, while Europe and Japan are hit harder. European central banks are facing a dilemma as higher oil prices could push inflation higher, making rate cuts in Europe appear more precarious. This situation is expected to create higher market volatility, leading to more fluctuation in growth and inflation data.
More detail via Yahoo News here… ( Image via Yahoo News )