The economic growth outlook worsens, and the euro is set to record its worst monthly performance in over a year

The Zhitong Finance APP noted that the euro is likely to have its worst month in over a year, influenced by the prospect that U.S. trade tariffs could severely impact an already battered European economy. Since November, the euro has fallen about 3% against the dollar to 1.0575, slightly below the two-year low set earlier this month. This marks the largest monthly decline since May 2023. Investors are concerned that if Trump imposes tariffs on U.S. imports, the European economy will be affected, which could lead policymakers to cut interest rates more aggressively, causing the euro to lose favor. Signs of stagnation in the economies of the eurozone's two largest economies, Germany and France, along with political turmoil, have also fueled the sell-off. Luca Paolini, Chief Global Strategist at Pictet Asset Management, stated, "The outlook for Europe is generally bearish at the moment. There is significant policy divergence, economic growth is very weak, and there are numerous risks related to Russia and Ukraine." Despite the dollar soaring since Trump's election victory, the euro has been the worst-performing currency among the G10. This is mainly due to market expectations that the European Central Bank will cut borrowing costs by 150 basis points before the end of 2025, roughly double the Fed's forecast. This week, the European Central Bank's hawkish comments, along with Trump's latest round of tariff threats targeting Canada, Mexico, and China instead of Europe, provided some relief for the euro. The desire to sell the euro has also diminished after it quickly rebounded from below 1.05 (a level traders pay close attention to). Risk reversals indicate that market sentiment towards the euro is improving, and December is typically a good month for the euro due to dollar outflows at year-end. Michael Pfister, a foreign exchange strategist at Deutsche Bank, stated, "The market's assessment of the eurozone economy is already very low, so it is difficult to see a significant decline in the euro at this point." However, with increasing signs that the economy is struggling, investors are still likely to face more losses next year. Eurozone business activity unexpectedly contracted in November, and Germany's inflation rate did not accelerate as economists had expected. According to the latest weekly data from the U.S. Commodity Futures Trading Commission (CFTC), hedge funds and other leveraged investors' bets against the euro have risen to their highest level in three years, with more strategists expecting the euro to fall to parity against the dollar. Carmignac fund manager Abdelak Adjriou stated, "There is no tariff risk priced in, and the euro level only reflects the monetary policy divergence between the European Central Bank and the Fed. Frankly, this dynamic is unfavorable for Europe."