Currency Note

USA in recession but European economies show growth

By Sharyh Murray-Francis July 29th, 2022

Sterling’s rise against the US dollar has continued through the week and it now stands well over 2% stronger than last Friday.

Against the euro the rise has been similar, but yesterday’s strong gains have been pared back slightly this morning.

The big news from the business world is the USA falling into a ‘technical recession’, following two quarters of falling GDP. This has caused the dollar to weaken against all of its major and many of its minor competitors. President Biden blamed the recession on the Fed raising interest rates rapidly to beat inflation, and the predicted damage to the economy could mean that rates are hiked more slowly in future.

On the other hand, data this morning from Europe has shown French and Spanish GDP rising well in advance of expectations, at 0.5% and 1.1% respectively, and German at 1.4%.

In Germany, measures to control energy use have started, with some regions switching off spotlights on public monuments and cold showers imposed in municipal swimming baths.

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GBP: Pound at 12-week high against EUR

The pound continues to strengthen against the euro following threats to eurozone gas supplies. Sterling has strengthened against the dollar despite the US Federal Reserve’s interest rate-hike decision earlier this week, as the US enters a ‘technical recession’.

In data releases, UK car production has increased, rising by 5.6% year-on-year, with battery electric vehicles (BEVs) at the forefront, suggesting hints of optimism in manufacturing industries, and an end to supply chain problems.

There are indications that consumer optimism may also take a major fall in response to the UK’s soaring inflation rates. Analysts have warned there is ‘worse to come’ as home energy bills could almost double in early 2023. Figures are expected to rise from around £2,000 per year up to a staggering £3,850. This increase adding heavy weight on consumers.

Pound to US dollar over past year

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EUR: European GDP rising

Yesterday, the euro weakened against the pound, while strengthening against the dollar following the US GDP data.

As Russia continues to squeeze on gas supplies, the threat of recession is looming for the eurozone, however, this morning’s results for France and Italy have been a cause for optimism.

However, consumer optimism is at historic lows. Spain’s business confidence fell 5.2 against an expected drop of 0.6, while the overall eurozone consumer confidence reading hit a record breaking low of -27, reiterating the rising fears of recession among European consumers.

USD: USA in recession

News that the USA is in a technical recession caused the dollar to weaken across the board.

Despite the Federal Reserve’s attempt to rebalance supply and demand within the US economy, its policy of rapidly raising interest rates has, in the opinion of President Biden, caused the recession.

In the wake of the Federal Reserve’s interest rate-hike decision, the prospect of ending the aggressive rate-hiking cycle seems to be on the horizon for the US businesses and consumers.

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