Euro to South African Rand (EUR/ZAR) Exchange Rate Slumps as Data Shows Italy Entered Recession

Italian Recession Drives Euro South African Rand (EUR/ZAR) Exchange Rate Down

As the Italian economy contracted for two consecutive quarters the Euro to South African Rand (EUR/ZAR) exchange rate extended its latest bout of losses further.

The mood towards the Euro (EUR) soured as the fourth quarter gross domestic product confirmed that Italy has fallen back into a state of recession once again.

Coupled with the muted state of economic growth across the Eurozone this left EUR exchange rates on a weaker footing, with the odds of a 2019 European Central Bank (ECB) interest rate hike looking increasingly distant.

Markets are concerned that Italy may struggle to return to a positive state of growth in the near future as tensions between the Italian government and EU officials remain heightened.

An unexpectedly sharp contraction in German retail sales in December added to the bearish mood of the single currency this morning.

South African Rand (ZAR) Gains Boosted as Trade Surplus Widens Sharply

December’s South African trade balance figure offered the South African Rand (ZAR) a boost, meanwhile.

As the trade surplus widened from 3.2 billion to 17.1 billion this encouraged a greater sense of confidence in the underlying health of the South African economy.

Although the US-China trade spat continues to cast a significant shadow over the global trade outlook this was not enough to prevent this improvement.

With markets in a more risk-positive mood in the wake of Wednesday’s more cautious Federal Reserve policy announcement ZAR exchange rates were encouraged to make solid gains across the board.

Weaker-than-expected South African producer price index data also failed to weigh down the Rand.

Euro (EUR) Exchange Rates Vulnerable to Softening Eurozone Inflation

Demand for the Euro is unlikely to pick up significantly ahead of the weekend as forecasts point towards an easing in January’s Eurozone consumer price index.

The annual inflation rate is expected to ease from 1.6% to 1.4% in the first month of the year, reflecting a similar decline in the German inflation data.

As this would push inflation further below the ECB’s 2% target this is likely to further undermine the case for policymakers to consider raising interest rates again in the near future.

On the other hand, a stronger showing from the CPI could offer the EUR/ZAR exchange rate a solid rallying point.

Any downward revisions to January’s Eurozone manufacturing PMIs, however, may put an additional dent in the appeal of the single currency.

Improving South African Manufacturing Sector Growth to Boost ZAR Exchange Rates

The South African Rand may find further encouragement on the back of January’s South African manufacturing PMI, though.

With the manufacturing sector expected to push further into growth territory, moving away from the neutral PMI baseline of 50, confidence in the domestic outlook is likely to improve.

After lagging in contraction territory for much of 2018 investors are hoping to see the South African economy recovering its economic momentum.

However, if the PMI falls short of forecast this could give the EUR/ZAR exchange rate a boost, particularly if the general sense of market risk appetite diminishes.

Hannah Wilson

Contact Hannah Wilson