The euro encountered significant headwinds on Friday, as its exchange rate against the US dollar continued its downward trajectory for a fourth consecutive session, reaching 1.1715. This decline occurred concurrently with the European Central Bank's (ECB) decision to hold its benchmark interest rates steady. Furthermore, ECB President Christine Lagarde explicitly declined to pre-commit to a specific path for future monetary policy adjustments. Although the ECB did revise its economic growth forecasts upwards for 2025 and 2026, suggesting a more optimistic outlook, this revision did little to alleviate market anxieties regarding the immediate economic landscape.
The ECB's cautious approach stood in stark contrast to developments in the United States. November's Consumer Price Index (CPI) data revealed a welcome slowdown in inflation, decreasing to an annual rate of 2.7%. However, market participants displayed a degree of reservation, acknowledging potential limitations in the data collection methodologies. Simultaneously, a weaker-than-expected US jobs report, which indicated a softening labour market with only 64,000 new nonfarm payroll positions and an unemployment rate increase to 4.6%, significantly eroded the dollar's strength. This diminished strength was further reflected in the DXY Dollar Index, which fell by 0.35% to 97.91.
Across the Atlantic, the United Kingdom presented a mixed economic picture. While the pound sterling experienced a notable appreciation against the dollar, the GBPUSD pair climbed 0.42%, domestic labour market figures suggested a less favourable trend. The UK unemployment rate ascended to its highest level since early 2021, indicating a potential weakening in employment conditions. Despite this, strong business activity, as demonstrated by S&P Global Purchasing Managers' Indices (PMIs), has generated substantial expectations for the Bank of England (BoE) to initiate interest rate cuts imminently, with analysts assigning a 92% probability to this action occurring on Thursday.
Germany, a key indicator for the Eurozone's economy, exhibited signs of pressure. The German GfK Consumer Confidence Survey reported a further decline in sentiment, dropping to -26.9 in January. Additionally, the German Producer Prices Index indicated a stagnation in factory gate inflation and, more concerningly, a contraction over the preceding twelve months, signalling a potential impediment to industrial output. Adding to fiscal uncertainties within the bloc, France's parliament is anticipated to miss its year-end budget approval deadline, necessitating a special rollover law, a development that BBH FX analysts warned could exacerbate fiscal stress and negatively impact the euro.
In contrast, Cyprus appears to be experiencing a period of moderate economic expansion. The Composite Leading Economic Index (CCLEI) registered a modest year-on-year increase of 1.8% in November. This growth was propelled by positive sentiment, a thriving tourism sector, and favourable conditions in retail, property, and lower oil prices, although these were partially counteracted by challenges in electricity production. The Economic Sentiment Indicator (ESI-CypERC) remained largely stable, despite a slight dip in overall business confidence, particularly within the services sector. However, a significant decrease in the Economic Uncertainty Indicator for Cyprus, falling to 10.9 points, suggests a reduction in consumer apprehension, contributing to a cautiously optimistic economic narrative on the island.