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(Bloomberg) — The euro fell to its weakest level versus the dollar in over two years and the pound slid to an eight-month low amid ongoing concerns about Europe’s economy.
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The common currency fell as much as 0.4% to $1.0314, the lowest since November 2022, extending its decline since late September to around 8%. The pound dropped to the weakest level since May.
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The euro has been dragged lower by fears that the bloc’s export-orientated economies will be hit by US trade tariffs and expectations the European Central Bank will cut interest rates more aggressively than the Federal Reserve. Political instability in the bloc’s biggest economies has also added to the pressure.
For the pound, the main headwind has been weak UK growth, which has reinforced the case for deeper interest-rate cuts. Britain’s GDP was flat in the third quarter of 2024 and the Bank of England expects the fourth quarter to show no growth as well.
“Weak growth is a common issue for Germany, France and the UK with the latter suffering from a step up of recession fears on the back of the soft UK GDP releases at the end of 2024,” said Jane Foley, head of FX strategy at Rabobank. She sees the euro moving to parity versus the dollar in the second quarter.
Many strategists are forecasting the euro to slide to parity with the greenback or even below that this year. The last time this key psychological threshold was passed was in 2022, after Russia’s full-scale invasion of Ukraine sparked an energy crisis in Europe and provoked fears of a recession.
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Traders were reminded of the bloc’s energy woes on Thursday, as the flow of Russian gas to Europe via Ukraine was halted. The stoppage means central European countries will be forced to source more expensive gas elsewhere, compounding pressure on supplies just as the region depletes winter storage at the fastest pace in years.
Still, the European Central Bank’s 2% inflation target remains in sight, according to a New Year’s day message from President Christine Lagarde. Euro-area consumer-price growth decelerated over the course of last year and went below the ECB’s target in September, though it has ticked up again in recent months.
Weaker Pound
Sterling was also hit by data Thursday showing the UK manufacturing sector contracted more than expected last month. The S&P Global manufacturing purchasing managers’ index was revised to 47 in December from 47.3 in the initial reading, indicating a third month of contraction.
The pound was the worst performer among Group-of-10 peers on Thursday, down as much as 0.7% to $1.2435. Jordan Rochester, the head of macro strategy in EMEA for Mizuho, forecasts the currency will fall to $1.23 this month as the market prices in more rate cuts from the BOE on the back of weak economic data.
The PMI data suggests “the momentum in the second half of December was even weaker,” said Rochester, adding BOE rate cuts are looking “underpriced” compared to the ECB.
Swaps imply 115 basis points of easing from the ECB through the end of the year, compared to 62 basis points from the BOE.
(Updates to add context, commentary.)
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