January 28, 2023

Europe heads for double-dip COVID-induced recession

LQDFXperts Weekly Highlights: Europe heads for double-dip COVID-induced recession

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Sentiment across markets was mixed, caught between fears that Europe heads for a double-dip recession and promising vaccine news.

A resurgence of global coronavirus cases outweighs the hopes for a working vaccine that could help reignite global growth. Global markets surged last week on optimism that a vaccine for COVID-19 would be available soon.

Pfizer announced that had developed a very effective vaccine, more than 90% effective in trials. Investors hope for similar news soon from rival Moderna and look past a tough winter to a better spring ahead.

The prospect of a vaccine is a source of relief. But the eurozone will still suffer as a result of new lockdown measures.

Investors cheered by data showing a robust recovery in China and Japan. Japanese growth beat forecasts to pull the world’s third-largest economy out of recession, rebounding sharply from its biggest postwar slump. Despite some signs of improvement in recent months, analysts expect Japan’s economy to shrink 5.6% in the current fiscal year.

Better-than-expected industrial output in China added to the enthusiastic mood. A regional China-backed trade deal, the Regional Comprehensive Economic Partnership (RCEP), sealed over the weekend further supported the mood. Fifteen Asia-Pacific economies formed the world’s largest free-trade bloc on Sunday, a China-backed deal that excludes the United States.

President-elect Joe Biden won the battleground state of Arizona late on Thursday. Trump on Sunday briefly acknowledged losing the US election but then backtracked. Meanwhile, Biden focused on tackling the coronavirus pandemic and set meetings with pharmaceutical companies developing vaccines.

Further, besides the virus, Brexit trade talks are chief among European investors’ concerns. There are signs that Britain and the European Union could make progress in negotiating a post-Brexit trade deal. But, as talks resumed in Brussels, Britain said on Monday its red lines remained unchanged.

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Vaccine optimism still a key player- Inflation and key releases eyed

A slew of U.S. Federal Reserve speakers is up this week. The November meeting minutes of the Reserve Bank of Australia are due on Tuesday.

  • Later today (Monday 16.11) the European Central Bank will release its ECB Financial Stability Review.
  • The RBA minutes will provide details of its meeting earlier in November on Tuesday (17.11). At the meeting, policymakers held rates at 0.10%, a record low.
  • Wednesday (18.11) is all about inflation. Traders will be looking for the UK Inflation Report, the Eurozone Inflation Report, and the Canada Inflation Report. Inflation remains low in the eurozone, reflective of weak economic conditions. In Canada, inflation remains at extremely low levels, reflective of subdued economic activity.
  • On Thursday (19.11), investors’ eyes are on the US Retail Sales. Retail sales are the primary gauge of consumer spending, a key driver of the economy.
  • Europe’s fiscal and monetary responses to the second wave of coronavirus infections will be in focus when ECB President Christine Lagarde speaks on Thursday (13.11).

Follow this week’s economic calendar.

LQDFXperts – Europe heads for double-dip COVID-induced recession 

Currency market traders became more risk-averse as the European Central Bank (ECB) stressed that the economic outlook remains uncertain.

EUR/USD settled down last week and posted slight losses. If the EU fails to reach a deal with the UK over Brexit, the euro could lose ground. The U.S. dollar rebounded after getting walloped a week earlier, courtesy of the US election.

GBP/USD showed little movement last week, in contrast to the pound’s sharp gains a week earlier, courtesy of the US election. It is unclear if the Brexit talks are on the verge of failure or will an agreement be announced, possibly at the European Summit on Thursday. Any Brexit news could have a major impact on the pound.

USD/JPY continues to be marked by strong volatility. The pair rose 1.17%, erasing almost all of the losses from the previous week. Japan will release the GDP for the third quarter. The yen edged higher at 104.49 per dollar, having posted its worst weekly performance since early June last week.

AUD/USD showed slight gains last week. The Australian dollar enjoyed sharp gains during the US election. The next move for the Australian dollar may depend on a clutch of data and speeches this week. Australian dollar traders awaited upcoming events by the Reserve Bank of Australia.

USD/CAD reversed directions last week, rising 0.75%. The US dollar has settled down after sharp losses during the week of the election. Still, the greenback could face a bumpy road, as Covid-19 could cause further an economic slowdown in the US.

PLEASE NOTE The information above is not investment advice.

Sources: Reuters, CNBC, BBC, The Guardian