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Euro Struggles on Increased Recession Risk; Rand Outlook Worsens After Central Bank Changes Tune on Interest Rates

The euro is under siege following disappointing data and news this week that Germany barely escaped a recession in 2018. The ECB will now wait longer before raising interest rates, analysts say; however, EUR/USD will still end the year higher. In South Africa, a prediction by the country’s central bank that interest rates will be raised only once before 2021 put an end to the rand’s great start to the year.

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The euro is under siege following a bombardment of weak European data.

Against the US dollar, the euro fell on Friday for the sixth day in the past seven, to a two-week low of $1.135. Against the Canadian dollar, which continues to benefit from a recovery in energy markets, the euro posted its lowest weekly close in more than six weeks, at just C$1.507. The euro struggles, too, against the Brexit-driven pound, Australian dollar and a host of other currencies, including emerging market currencies like the Thai baht, which can now buy more euros (฿36.06 per EUR) than at any point since early 2015.

In the past week alone, investors have learned that Germany barely survived a recession in the second half of last year, that industrial production in the eurozone is falling at its fastest rate in almost three years, and that inflation is slowing.

EUR to USD - 3 month chart - Latest
EUR/USD - 3 month Chart - Latest

“The Euro-area economic outlook has quickly turned dimmer and the first half of 2019 is unlikely to show much improvement,” writes the team at Nordea Markets.

With recession risks growing, analysts polled by Reuters last week now collectively predict that the European Central Bank will wait longer before raising interest rates. According to median estimates, the ECB will raise its deposit rate (currently -0.4 percent) in the fourth quarter but will wait until early 2020 to raise its refinancing rate above zero.

Despite these setbacks, against the US dollar, Danske Bank retains its “three-stage rocket” view for euro appreciation this year.

“With no new policy signals expected next week, we stick to our three-stage rocket to orbit view for EUR/USD. We have long been hinting that the next big move in EUR/USD will be higher on valuation grounds but stress that a rebound is a three-stage rocket, and Fed ‘on hold’ is only the first stage to orbit.”

At the start of the year, Danske listed EUR/USD as one of its “top trades” for 2019; it predicted a year-end rate of $1.25.

USD to ZAR - 3 month chart - Latest
USD/ZAR - 3 month Chart - Latest

In South Africa, a change in central bank projections has put an end to the rand’s impressive start to the year.

Given significant improvements to the country’s inflation outlook, the South African Reserve Bank predicted on Thursday only one further increase to its key interest rate (now 6.75 percent) between now and the end of 2021, down from a predicted three increases in November.

The rand had an excellent start to the year, gaining 5 percent against the dollar between January 1st and January 16th, which took USD/ZAR to a six-week low (rand high) of R13.68. Following the SARB’s update, the rand lost value on both Thursday and Friday—the first time this year it has lost value on consecutive days.

Exchange rate forecasts from the team at TradingEconomics.com signal a 10 percent loss in the rand’s buying power over the coming year; it predicts a 2019 year-end rate for USD/ZAR of 15.31.

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