Published: January 17th, 2024
European Central Bank policymakers will be heartened by new figures showing that Eurozone unemployment has dropped to an all-time low. Along with the happy tidings it brings for jobseekers, the figure also supports Frankfurt’s position on delaying interest rate cuts.
Eurostat said on Monday that unemployment in the Eurozone had fallen to 6.4 per cent in November 2023 from 6.5 per cent the previous month. The figure was driven by a drop in the number of unemployed of ca. 99,000 and outpaced the market expectation that unemployment would remain unchanged.
The robust labour market strengthens the economist consensus that Eurozone wages will hold firm at above-trend levels in the next few months, cooling hopes for a near-term fall in inflation to the ECB's two per cent target.
The fall in unemployment also adds credibility to recent ECB’s statements that an imminent rate cut isn't in the cards.
In an analyst note published this week, ING Bank said that as expectations around employment prospects improve, ‘a sudden rise in unemployment seems very unlikely in the first half of 2024.’
The apparently resilient Eurozone labour market stands in contrast to the sense of malaise that dominated Eurozone economic commentary stagnate in the final quarters of 2023, with surveys pointing to more sluggish growth to end the year.
A relatively tight labour market will drive more consumer and business spending, but ING economists say it also raises important questions for the European Central Bank.
One is whether or not growth in the eurozone economy has been held back by reductions in labour supply. Another will be to assess the impact of low unemployment on inflation.
The Euro began July 2023 softer across the board following a Eurozone inflation print for June that fell below consensus expectations and indicated price pressures were easing across the trading bloc.
Evidence that inflation was on its way back down to the ECB’s two per cent target sent EUR earthward, falling back against all its G10 currency peers as traders continued to trim expectations for the European Central Bank's (ECB) peak policy rate.
Headline HICP figures released by Eurostat showed that inflation was 5.5 per cent higher in June 2023, but down from 6.2 per cent in May and beneath the 5.6 per cent that economists and institutional analysts were anticipating.
Eurostat did capture a small uptick in the month-on-month figure, which rose to 0.3 per cent in June from 0 per cent in May and north of the consensus expectation of 0 per cent. The core inflation measure, however, is the one that has the greatest influence on central bank policymakers.
It takes out variables like food and energy prices and came in at 0.3 per cent month-on-month. That was less than the consensus expectation of 0.7 per cent, though slightly above the previous month's 0.2 per cent.
The greatest upward pressure came from Germany, which posted a 0.3% month-on-month rise in June headline inflation over -0.1 per cent recorded in May. However, German core inflation still fell below market expectation, hitting 0.3 per cent in June, while consensus was looking for 0.7 per cent.
In France, core inflation rose 4.5 per cent for the 2023 year-to-date, undercutting expectations for 4.6 per cent and under May's published 5.1 per cent figure.
In early May 2023 the Euro found itself in a similar situation, falling back against all its G10 peers except for the mighty USD. EUR only rose in relation to the Brazilian Real, Turkish Lira and Chinese Renminbi on the broader G20 table, however some analysts said it could remain a laggard for the near term.
EUR started experiencing losses when European Central Bank (ECB) President Christine Lagarde said on 3rd May that interest rates would likely be raised again soon, only holding steady until Frankfurt policymakers believed that their monetary decisions have become restrictive enough to send inflation back down to the central bank’s two per cent target.
The Euro experienced further declines when German state statistics agency Destatis announced that the country’s manufacturing orders fell more than 10 per cent in March, the biggest one-month decline since the onset of the pandemic. The print followed a Eurostat print which indicated that European retail sales dropped a full percentage point in the same month.
An analyst note from Nomura in London said that the broad EUR rally underway since last week ‘is done. EURUSD seems stuck below 1.1100 and most EUR crosses have recently spun lower.’
Whether or not the most recent economic data proves that a downturn is underway remains to be seen. Nomura says, however, that investors have realised the risk and may now be pricing-in a negative direction of travel, particularly as the ECB has unleashed its most hawkish monetary tightening on record. Traders will be watching to see what the impact will be on the Eurozone’s real economy.
That makes Europe's economic data calendar particularly important. A cascade of negative signals from the EU’s biggest economies could trigger forex traders to reprice their outlook for ECB interest rates.
It wasn’t the first time in 2023 that EUR found itself on the back foot against the Dollar. Forex analysts at MUFG said in February that a resurgent USD wasn’t being hindered by risk-off sentiment, or trader concerns about signals from the US Fed’s open markets committee.
As investors shrugged off PCE deflator data due the same week, MUFG said markets might be witnessing the return of Dollar dominance.
‘The upward adjustment to a higher terminal rate and cooling rate cut expectations for later in 2023 have spurred new life into the strong USD trade we saw at the end of 2022,’ says MUFG’s briefing.
Adding wind to USD’s sails is a lifting of investor expectations about the timing of the Federal Reserve's peak interest rate hiking cycle.
In January 2023, consensus had the next rate rise set for March, but an additional two hikes were then added to the schedule.