7 July, 2022 07:22AM ET
The Eurozone has a challenging growth outlook and also faces growing risks to external balances. What’s more, the European Central Bank (ECB) will likely deliver rate hikes at a slower and more gradual pace when comparing to many others. All this points to a weak outlook for the EUR, in the view of economists at HSBC.
The regional economic news is very challenging
EUR bulls had held out hope that the obvious and sharp manufacturing slowdown would be offset by stronger services. However, it does not appear that this shift in demand away from goods towards services (such as travel and leisure) is materializing. Indeed, signs of travel disruption across Europe may limit how much this sector can positively contribute through summer.
The risks to the Eurozone’s external balances are growing. Export growth remains weak and high commodity prices are pushing the import bill up for the region.
With the ECB sticking to its line, we will only see a 25 bps hike at its 21 July meeting – at a time when others are hiking much faster – and wait for its 8 September meeting to deliver a faster tightening, while there is little support coming from higher yields. All in all, this adds up to a weak outlook for the EUR.