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HomeboeStruggling European Currencies Face Prospective Rate Cuts as Economic Outlook Weakens

Struggling European Currencies Face Prospective Rate Cuts as Economic Outlook Weakens

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Struggling European currencies face further challenges as central banks consider rate cuts in response to a weakening economic outlook. On Thursday, the Bank of England (BoE) held rates at a 15-year high but Sterling still hit a six-month low against the dollar. Similarly, the Swiss franc fell almost 1% after Switzerland paused its rate rise cycle. The Swedish currency, which has already dropped over 6% against the US dollar this year, did not recover despite a quarter-point rate rise. Analysts and investors are concerned about the bearish outlook for European currencies, citing a strengthening dollar and stagnant economic growth as oil prices rise.

Kit Juckes, global head of currency strategy at Societe Generale, says that the focus is shifting towards growth rather than central bank actions. The BoE pledged to raise borrowing costs again if inflation cannot be controlled but acknowledged that economic growth is slowing. The European Central Bank (ECB) recently increased rates to a record 4% but the euro still fell and has lost almost 2% against the dollar this month. Juckes predicts that the euro could reach parity with the dollar. The ECB and the US Federal Reserve have both suggested that rates will remain higher for longer. However, traders are concerned about Europe’s economic underperformance and are betting that the ECB will be forced to cut rates before the Fed.

The Swedish Riksbank raised its key rate to 4% and expressed concern about the currency’s “unjustifiably weak” status. However, the currency remains near a record low against the euro. The Swedish economy is expected to contract this year due to the real estate market turmoil. The only central bank to strike a chord with markets is the Fed, which held rates steady but indicated one more rate rise this year. The US dollar index, which measures the US currency against its peers, is near its highest level in over six months. Manulife Investment Management’s chief investment officer, Nathan Thooft, attributes this to the relative strength of the US economy compared to Western Europe. He expects one of the major European central banks to be the first to cut rates.

Economists polled by Reuters predict that the euro zone economy will grow by 0.6% this year, the UK will expand by 0.4%, and the US will grow by 2%. The market’s expectations ahead of rate decisions have created volatility, as seen in the UK and the euro area this month. Nomura expects the pound to weaken to $1.22 by the end of October. ING economists state that the Swedish crown remains vulnerable.

Another factor contributing to the strength of the US dollar is the high oil prices, which are trading near 10-month highs above $90 a barrel. The US is less affected by higher oil prices due to its status as an oil producer, whereas Europe and Japan are more impacted. Higher oil prices also threaten to push inflation higher in Europe, putting European central banks in a difficult position. Orla Garvey, senior fixed income portfolio manager at Federated Hermes, suggests that growth and inflation data will become more volatile, leading to higher market volatility.

In conclusion, struggling European currencies face continued challenges as central banks consider rate cuts. The outlook for European currencies is bearish, with a strengthening dollar and stagnant economic growth in European nations. The BoE held rates at a 15-year high but Sterling still reached a six-month low. The Swiss franc fell after Switzerland paused its rate rise cycle. The Swedish currency remains weak despite a quarter-point rate rise. The euro fell even after the ECB increased rates to a record 4%. Traders expect the ECB to be forced to cut rates before the Fed. The relative strength of the US economy and the high oil prices contribute to the strength of the US dollar. Economic data will become more volatile, leading to higher market volatility.

More detail via Investing.com UK here… ( Image via Investing.com UK )

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