The euro went back above parity with the dollar on Wednesday for the first time since mid-September, taking advantage of a bout of weakness in the greenback and a possible new tightening of the ECB. The pound, for its part, continued to recover, the new Prime Minister Rishi Sunak reassuring the markets after the debacle of the ephemeral government of Liz Truss, which had sent the British currency to an all-time low.
The euro gained 0.49% to 1.0015 dollars around 10:30 GMT, benefiting from “a temporary reduction in concerns about energy and expectations of a rate hike next year in Europe after the new sharp contraction in indicators of PMI activity” published on Monday, explains Guillaume Dejean, of Western Union.
Eurozone unlikely to ‘avoid recession’
According to this index serving as a barometer of the economy, the decline in economic activity in the euro zone accelerated sharply in October in the private sector, heightening fears of a recession. Investors are therefore expecting the European Central Bank (ECB) to hit hard by raising its interest rates again by 0.75 points, which should support the single currency.
The European Monetary Institute had already raised its key rates twice since the summer, by 0.50 points in July and 0.75 points in September. And while the eurozone is “unlikely to avoid a recession”, mild weather and “significantly lower energy prices, especially gas, could provide some relief” in the short term, says Thu Lan Nguyen, of Commerzbank.
The analyst however warns: “it is still too early to hope for a lasting reversal” concerning the energy crisis in Europe which has eroded the purchasing power of consumers in recent months.
Consumer confidence deteriorated in the United States
The euro also largely benefited from the decline of the dollar, after a series of unfavorable economic indicators. The greenback “fell to its lowest level in three weeks on signs of a slowing economy in the United States and expectations of a less drastic hike from” the Federal Reserve, comments Victoria Scholar, analyst at Interactive Investor.
Consumer confidence, for example, deteriorated more than expected in the United States in October, according to the Conference Board index published on Tuesday, due to persistent inflation and the prospect of a recession.
The dollar could suffer from a less aggressive than expected rate hike by the Federal Reserve (Fed). “But nothing official indicates for the moment a possible softening of the tone of the Fed”, moderates Ipek Ozkardeskaya, analyst at Swissquote.
The pound surfs the dollar
The pound sterling also benefited for the moment from the weakness of the dollar, and returned to a level more seen since mid-September against the greenback, before the disastrous “mini-budget” of the former Prime Minister of Liz Truss. These measures had caused the currency to plunge to its historic low. The pound took 0.78% to 1.1561 dollars, after rising to 1.1620 dollars.
The British currency had started the week on a positive note, then soared on Tuesday, gaining almost 2% against the dollar, surfing on both the decline of the greenback and the inauguration of the new British Prime Minister Rishi Sunak, well received by investors. “There is no doubt that the arrival of Rishi Sunak as Prime Minister has helped to allay fears of reckless fiscal policy,” says Neil Wilson of Markets.com.