Eurozone: Recovery proceeding at a more measured pace – Wells Fargo

“As the Eurozone economy shows a further perceptible firming in growth in the months ahead, we expect the European Central Bank to eventually follow suit by announcing a slower pace of its bond purchases from Q4 2021 at its September meeting”, says analysts at Well Fargo. They point out the UK's faster economic rebound and the earlier move to less monetary policy accommodation suggests greater upside risk to their medium-term GBP/USD target of 1.4900 than their EUR/USD target of 1.28. In the short-term they anticipate the pound will perform more strongly versus the greenback, “although the euro may catch up a bit over the longer-term as the economic recovery in the Eurozone gains further momentum.”

Key Quotes: 

“The Eurozone economy is also recovering, but the rebound in activity appears to be more measured. In part this reflects a slower start by many Eurozone governments in vaccinating their populations against COVID. This resulted in lockdowns still being in place in April in some Eurozone countries, and other restrictions were in some cases in place later.”

“The level of Eurozone retail sales in April was only 0.3% above the Q1 average, a stark contrast to the much larger gain reported for the United Kingdom. We also observe that the level of Eurozone Q1 GDP was still 5.1% below its pre-pandemic peak from Q4 2019.”

“While things have improved since for the Eurozone, with the upswing gaining some momentum, this theme of Eurozone recovery but at a slower pace is also reflected in confidence surveys. In particular, the U.K. services PMI rose to 62.9, a multi-decade high. The Eurozone May services PMI rose but not by nearly as much to 55.2, the highest level since June 2018.”

“Diverging paths of monetary policy have resulted in slightly diverging outlooks for the British pound and the euro. As monetary policy turns less accommodative in the U.K., we expect the pound to rally and risks around our forecast are tilted to the upside. As far as the euro, while we are forecasting a stronger currency, the pace of appreciation is likely to be more gradual as the ECB may be more cautious about paring back monetary policy accommodation in the near future.”