Eurozone economy shows 'remarkable resilience' despite energy price spike

The Eurozone economy continues to display remarkable resilience even in the face of the energy price spike.

We expect this week's PMI indices of business activity to further confirm this resilience, and the manufacturing subindex specifically could surprise to the upside as German industry bounces back from transport difficulties caused by the low levels in the Rhine, as well as the continued diffusion of higher defense spending.

With headline inflation unlikely to provide the ECB with any respite, we now expect another hike from the central bank at its December meeting, which we think should help return the euro to a gradual path higher against the US dollar in the medium-term.

In the near-term, however, the common currency could come under further selling pressure given surge in oil prices, which are worsening the bloc’s terms of trade, and the sell off in bond markets, which could drive further safe haven flows into the US dollar.