Rose Tinted Spectacles

Thu 12 Apr 2018


The European sovereign debt crisis that gripped the eurozone at the beginning of this decade has left the bloc with rose tinted spectacles. During the crisis, the economic performance of key Eurozone member states tumbled considerably. Shown in the Graph below, the economic growth rate within previously flourishing and affluent member states tumbled during the crisis. In fact, only the fiscally sustainable nation of Germany, with an infatuation towards a balanced budgets and structural austerity, survived relatively unscathed.



More than headline national accounts and gross domestic product, the crisis hurt citizens: the rate of youth unemployment doubled in a matter of months, converging around 20% in Ireland, Greece and Spain. This woeful economic performance coincided, and contributed to, considerable social and political unrest; two phenomena that are particularly business UNfriendly! However, as business conditions eased, and economic growth returned several years into the decade, the tide started to turn on confidence and investment. Now though, the trend appears somewhat overbaked!


The Euro has rallied impressively throughout 2017 and 2018 to date. Having survived numerous and high salience national elections, the Euro remains poised for a strong and sustained appreciation in the eyes of many investors. However, economic confidence may appear to be on the turn.


Economic confidence indicators are labelled as ‘soft’ data, due to their reliance upon sentiment and survey data. The data consistently proves to be more dynamic and reactive to economic movements than traditional hard data and national account. Admittedly, the data often comprises of considerable noise. Despite the limitation of sentiment-based indicators, they do have a fundamental and inalienable correlation with economic performance and more lagging hard data. As such, they still confer a high salience and the capacity to move exchange rates.


Following the remarkably poor economic performance during the European sovereign debt crisis described above, the purchasing managers are viewing the Eurozone with rose-tinted spectacles. The Eurozone soft, sentiment-based, data stands close to an all-time high, despite the underwhelming political and economic landscape. Worryingly for the Euro, the sentiment-based data may be on the turn:


This week, yesterday, vast purchasing managers’ index (PMI) data was released, providing a timely update on the Eurozone economy. At the national level, the composite performance in Italy and Germany fell considerably. Moreover, across the entire Eurozone, services and manufacturing indices underwhelmed expectations and fell at the aggregate level.


Accordingly, the Euro has underperformed towards the end of this week, weakening up to 1.1460 against the Pound this afternoon and falling as low as 1.2215 against the Dollar. As Federal Reserve chairman Jay Powell speaks this afternoon following extensive labour market data in the united states, the latter currency pair, EURUSD, could be a pivotal pair.

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