European Economies on the Rise, Dollar and Pound Face Challenges.

  • Southern Europe Outperformance: Spain, Greece, Italy, and Portugal are set to outpace the broader Euro area, fueled by tourism, competitiveness, and financial improvements.
  • Historical Struggles: From 2007 to 2022, Southern European economies grew slowly due to the financial crises, with an average annual GDP growth of just 0.1%.
  • Recovery Forecast: Real GDP growth in these countries is projected to reach 1.7% from 2023-2025, nearly double the Euro area’s 0.9% rate.
  • Dollar Weakens: The US dollar dropped, with a 58% chance of the Federal Reserve cutting rates by 50 basis points, leading to further weakness against major currencies like the yen.
  • Pound Faces Pressure: The British Pound saw limited movement, weighed down by concerns over slowing wage growth, missed GDP expectations, and possible BoE rate cuts.

EUR:
The Southern European Economies (SEE)—Spain, Greece, Italy, and Portugal—are poised to outperform the broader Euro area, driven by a surge in tourism, improved competitiveness, and a resolution of past financial issues, according to QNB. These nations have struggled since the Global Financial Crisis (GFC) of 2007, facing significant fiscal challenges such as soaring sovereign debt, inflexible labor markets, and private sector over-indebtedness. During the period from 2007-2022, SEE’s GDP grew at an average rate of just 0.1% annually, trailing nearly 1% behind the Euro Area’s overall growth rate. However, SEE economies are now recovering, bolstered by both cyclical and structural improvements. From 2023-2025, SEE’s real GDP is expected to grow at an average of 1.7% per year, nearly double the 0.9% rate projected for the Euro Area.

USD:
The US dollar slid 0.3% on Monday, nearing its lowest point since January, as Bloomberg’s US currency index shows. This drop has benefited major currencies like the yen, which reached its highest level since July 2023. The market is betting on the Federal Reserve easing its monetary policy, with traders now favoring a 50-basis point rate cut. Futures tied to the Fed’s decision this week indicate a 58% chance of a half-point reduction, compared to a 50/50 chance late last Friday. According to Rodrigo Catril of National Australia Bank, the impending Fed easing cycle could be a significant drag on the dollar, with the greenback already weakening against most major currencies. The yen has gained notably, as investors anticipate shrinking interest rate gaps between the US and Japan. Some analysts suggest a more conservative 25-basis point cut might stabilize the dollar, but most expect it to continue weakening as the Fed eases its stance.

GBP:
The British Pound (GBP) saw limited movement on Monday due to a lack of new economic data. On Tuesday, the release of UK employment figures provided some momentum, with the unemployment rate dropping to 4.1%, aligning with forecasts. However, this boost was dampened by a larger-than-expected slowdown in wage growth, raising concerns among Bank of England officials about ongoing inflationary pressures. These wage concerns are fueling speculation that the BoE may consider rate cuts, limiting the Pound’s gains. Further weakening came as the UK’s July GDP data missed expectations, showing no growth versus the predicted 0.2% expansion. With mixed market sentiments and little new data, the Pound remained adrift. Looking ahead, the Fed’s rate decision and the UK’s inflation data could steer market movements, with persistent inflation in the UK possibly supporting a stronger Pound.

*All rates shown are indicative of interbank rates and should only be used for indication purposes only. It is important to note that foreign exchange rates fluctuate and that rates may vary depending on the amount and the base currency that is purchased or sold. Rates are correct as of 8:00am UK time. CentralFX are not responsible for the rates shown.