Having made strong progress over 2017 and the first few weeks of the year, the euro has since traded in a relatively narrow range.
While the eurozone’s economic recovery gathered momentum, the euro was on a seemingly unstoppable upward march.
Since the beginning of 2016 until the end of January this year, the euro gained 18% against the dollar, to stand at $1.24.
However, since then the euro has made no further progress and currently trades at slightly below $1.24.
Until recently, stories about the eurozone economy’s improving fundamentals were dominating the headlines.
As widely expected, in October the European Central Bank (ECB) revealed it would further unwind its quantitative easing programme, reducing asset purchases from the beginning of 2018 to €30bn per month from €60bn previously.
With eurozone data continuing to strengthen going into 2018, expectation was building that the ECB could even begin raising interest rates this year.
However, over the past few months the narrative has changed somewhat.
Eurozone inflation has begun to soften while other recent data from the bloc suggests that economic activity may have already peaked.
Rather than interest rate tightening then, expectations are increasing among economists that the ECB will announce a further extension to the current round of quantitative easing that is scheduled to end in September.
As 2017 drew to a close, it seemed as though the economic news on the eurozone would keep getting better throughout 2018 as well.
In December, the ECB upwardly revised its 2018 growth projection for the eurozone economy to 2.3% from its prior estimate of 1.8%.
Indeed, eurozone unemployment has continued to fall, easing to a rate of 8.5% in February, its lowest level since December 2008.
Nevertheless, eurozone inflation has been falling further away from the ECB’s 2% target, having weakened to 1.1% in February versus 1.3% in the prior month.
The recent fall in eurozone inflation by itself makes an interest rate hike from the ECB this year look highly improbable.
At the same time, much of the recent weakness in inflation can be attributed to the strong appreciation in the euro during 2017.
A stronger euro puts downward pressure on import prices, a delayed effect that notoriously takes some months to translate into lower consumer price levels.
However, of late there have also been those all-important signs that eurozone economic activity has peaked.
This is also creating a drag on the euro, with weaker data raising doubts over where the eurozone is currently headed.
The recent weakening trend in survey data has already started to be confirmed by actual data.
Figures released on eurozone industrial production last week showed a fall of 0.8% in February versus the prior month, a big downside surprise considering economists had expected a 0.1% improvement.
Economists are increasingly predicting a decline in eurozone growth for the first quarter of 2018 compared to the 0.6% rate of the fourth quarter.
In fact, the fourth-quarter reading was already lower than the third-quarter growth print of 0.7%.
“As most indicators have undershot expectations over the last two months, the risk of a growth deceleration in the first quarter is now very real. To be sure, we still believe that 1Q GDP growth will come out close to 0.5%, but the growth momentum is clearly slowing,” said Peter Vanden Houte, chief eurozone economist at ING.
While the signs of peaking momentum were already present, recent developments such as Donald Trump’s decision to impose tariffs on US imports have only served to weaken sentiment.
Given the eurozone’s strong dependency on exports, the worries over a potential outright global trade war are especially harmful.
Geopolitical events such as the US strike in Syria, along with the deterioration in relations with Moscow, are also hampering the outlook for global trade.
On the political front, there have been some positive developments in terms of lowering investor uncertainty in the core eurozone.
Last year’s win for centrist Emanuelle Macron in the French Presidential election has been followed by Angela Merkel's achievement in securing a fourth term as German Chancellor.
For now, however, politics is taking a backseat as investors focus on eurozone economic data.
If the weakening trend continues, as presently it looks it will, one of the big stories of 2018 could well turn out to be euro depreciation, a significant and abrupt reversal considering the euro strength we witnessed throughout last year.