Euro slides as ECB disappoints

Welcome to my account of what’s affected the euro exchange rate this week, covering the 27th July to 3rd August 2012. This is intended as a brief guide to the latest movements in the euro, to help you decide the best time for you to change currencies.

Rate changes this week:

Euro to pound: 0.7828 to 0.7851 (+0.294%)
US dollar to pound: 0.6359 to 0.6434 (+1.179%)
US dollar to euro: 0.8123 to 0.8215 (+1.133%)

What’s affected the euro exchange rate this week?

1. The European Central Bank shoots and misses.

As we can see here, the US dollar was the comeback kid this week, stealing more than 1.0% each from the pound and euro. What explains this revival in the buck fortunes? Well, it has a lot to do with disappointment in the European Central Bank.

Last Friday, ECB president Mario Draghi gave a speech in London, in which he promised to do “whatever it takes,” to secure the euro, assuring his audience, “believe me, it will be enough.” That was a nitro boost to global sentiment, and up to yesterday’s meeting of the central bank, the euro soared like a helium balloon against the buck.

Yet, when push came to shove, the Italian banker actually had very little to back up his big words yesterday, merely issuing vague assurances about buying Spanish and Italian debt sometime in the future. That then sent the euro (and the pound, which is also affected by Eurozone sentiment) back to earth with a clunk.

2. German manufacturing comes to a standstill.

The euro also fell against its US counterpart as figures point to a deepening economic gloom. Most importantly, Germany’s juggernaut manufacturing sector shrank to 43.0 last month according to Markit’s PMI, its lowest figure since 1996 and the thirteenth consecutive loss (in this scale, figures beneath 50.0 point to contraction.)

Of course, this isn’t just a German problem. Ken Wattret, chief Eurozone economist for BNP Paribas, notes “The malaise of the highly export-oriented German manufacturing sector is worrisome from the perspective of the state of the global economy.” Rather, the UK, US and China all have a similar spanner in the works. Yet it was this that put downward pressure on the euro this week.

What’s in store next week for the euro exchange rate?

1. The US job market looks set to continue winding down.

In the past three months, the United States has averaged just 75,000 new jobs each month. That’s less than half the rate needed to reduce the 8.1% unemployment rate, and not enough to keep pace with population growth. Alas, July looks set to be no different. That though could further bolster the dollar against the euro, as the markets flock to the buck as a haven.

2. The Eurozone will keep edging toward its banking union.

One thing Mario Draghi did make clear in his speech this week is that it’s not the responsibility of the European Central Bank to fix Europe’s crisis. Instead, the buck stops with elected politicians. So next week, we’ll see if Mariano Rajoy et al. can overcome German opposition to a banking union, crucial to keeping the currency union in one piece. If they fail, the euro might sink once more.

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