July – September 2018 Currency Forecast – Factors to Watch in Europe

 

Factors to Watch in Europe

The eurozone’s economy hasn’t performed quite as well as expected in 2018, with many stating that the economic forecasts made at the turn of the year were a little too optimistic. However, the situation has been exacerbated by the ongoing trade dispute with the Trump administration and in recent weeks has become even worse, with Trump threatening to impose tariffs on
European car imports. While those tariffs are yet to materialise, the eurozone’s economy is already taking a hit.

 

What to look out for:

Trade war:

When the European Union cut its eurozone growth forecasts, it was the clearest sign that the ongoing trade disputes with the Trump administration were having a significant impact on the European economy. At the time of writing, there are only tariffs on steel and aluminium imports, but Trump’s threat to impose tariffs on European car imports has rattled the European Commission. Business confidence has already been affected, but if Trump moves ahead with his plans, the global economic recovery could be disrupted.

Political and policy uncertainty:

At the start of June, Giuseppe Conte was sworn in as the prime minister of the new Italian populist government. While Conte assumes the role of the most powerful office in Italy, it is the leaders of the right-wing League party and the anti-establishment Five Star Movement who will likely call the shots. It is of some concern that the new government is eurosceptic and has promised a spending and tax-cutting binge. We could be heading towards a new European crisis which would rattle investors and the eurozone as a whole.

Monetary policy normalisation:

On 14 June 2018, the European Central Bank stunned the markets by announcing it would halve the pace of its quantitative easing programme to just €15 billion per month after September. More surprising still, was the decision to stop buying any new bonds from December. Ultimately, this means that the ECB has decided there is no longer a need for an ultra-loose monetary policy. However, Mario Draghi has insisted that interest rates will not be increased until at least the middle of next year. It is possible that Draghi could leave his position as president of the ECB without ever having increased interest rates.

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