GO
Loading...

Easing of Slump Won't Halt Euro's Decline

Euro Tumbles
Adam Gault | OJO Images | Getty Images
Euro Tumbles

Business activity data for the euro zone is set to show a slight uptick on Thursday which could give the single currency a temporary boost, but analysts are unanimous in their thinking that the single currency is set for a much larger fall over the long-term.

Markit's euro zone composite PMI, which gauges how thousands of businesses across the region fare each month, is estimated to rise to 48.1 from a figure of 47.7 for May. But Neil Mellor, a senior currency strategist at BNY Mellon told CNBC that any sustained upside for the currency would be doubtful.

"The euro just doesn't react to underlying fundamentals," he said.

(Read More: Euro Zone Faces Make-or-Break Summer)

The euro has largely been a story of reverse diversification in foreign currency, he said. The recent fall in emerging market currencies has meant reserve managers are accumulating fewer dollar reserves to diversify into euros, with China making clear that they want fewer reserves in the first pace, he said.

"The euro could well finish the year weaker against sterling and the dollar," he said.

Another headwind for the currency, according to Sebastien Galy, a currency strategist at Societe Generale is the continued threat of negative deposit rates from the European Central Bank - effectively charging banks to hold cash overnight.

"The ECB is ready for negative interest rates. Its impact will be clearly negative on the EUR as the experience from Denmark shows. Investors do react badly when asked to pay on their own deposits," he said in a research note on Monday.

The central bank is likely to ease monetary policy further due to "japanification", Galy said, as the recent strength of the euro against the yen spreads concern with the current strong balance of payments in favor of Japanese exports.

(Read More: 'Uneasy Calm' in Euro Zone Bonds Could Be Over)

"The EURUSD is not necessarily seen as strong enough yet to ease if you are say in Germany but far more so in the periphery," he said.

Both services and manufacturing data, which feeds into the headline figure, is also set to rise according to a Reuters poll, despite continuing to remain below the 50 point mark. A level below 50 is consistent with contraction, while a level above signals expansion in activity.

The euro dipped slightly on Tuesday morning as ECB President Mario Draghi said the central bank is "ready to act" if need be to aid the euro zone economy. Speaking at a farewell conference for Bank of Israel Governor Stanley Fischer in Jerusalem, Draghi said there were numerous measures the ECB could and would deploy if needed, according to Reuters.

(Read More: ECB's Draghi: Rates Becoming More Effective Again)

Despite slipping, the euro quickly made up ground after a better-than-expected data on German economic sentiment. Estimates from Reuters for Thursday's PMI data may look equally good. Flash data for each key individual euro zone country also looks set to rise, according to estimates, albeit continuing to show a contraction. But Chris Scicluna, an economist at Daiwa Capital is not quite as optimistic.

"In light of the severe floods in Germany, we expect the German PMI to have fallen, perhaps markedly, likely pushing down the area-wide index," he said in a research note on Friday.

By CNBC.com's Matt Clinch. Follow him on Twitter @mattclinch81.

Contact Europe: Economy

  • CNBC NEWSLETTERS

    Get the best of CNBC in your inbox

    › Learn More