The US Continues to Trump the Euro Economy on Key Metrics, But What Is Next?

A clear measure of public confidence in a national economy, as well as the ability to access a key component of it, is how many new homes are being sold compared to previous months.

There are a number of important factors that point to the overall health of a nation and its population's finances, which are demonstrated by this, for example, the ability for people to access mortgages and pay reasonable interest on the repayments, creditworthiness and the ability to repay those mortgages, and enough confidence that there will be a market for the homes that a construction company would see fit to invest in buying the land and endure the upfront costs of building homes.

Today, in the United States, new home sales figures for January 2024 will be announced, and the expected figure, according to many economic calendars, is around 680,000 new homes sold in January this year compared to 664,000 in the same period last year.

Interest rate increases have burdened mortgage holders as well as those making repayments on unsecured borrowing over recent years, and the same interest rate increases have caused corporations - including homebuilders - to have to pay more toward their monthly borrowing over this period of high-interest rates.

By their very nature, interest rate rises are designed to curb spending in order to reduce inflation, and in the context of property construction and purchase by domestic customers, it is clear that a rising interest rate would likely have an effect on buyers as well as construction companies.

However, the strength of the US economy has once again shown its mettle over the past few days, as the US Dollar has been strong against other majors. Looking at the EURUSD pair, considerable volatility has been evident. At 9.10 am UK time this morning, the EURUSD was trading at 1.08347, which shows a slight upturn in fortune for the Euro, which on February 20 had stood at 1.07750.

Whilst the Euro has climbed a bit over the past two weeks, it remains depressed compared to the 1.11094 reached on December 28 last year by the EURUSD pair.

The ensuing rally by the US Dollar against the Euro may have been caused by the US central banking authorities deciding to maintain interest rates at their current rate. Despite the widely speculated interest rate decrements not actually coming to fruition, it looks likely that there will be no more increases, meaning that mortgage borrowers are more likely to be confident that their current monthly payment will not rise dramatically in the near future.

Perhaps this is a correlation between strong new home sales figures and borrower confidence in the US.

The European Union, by comparison, is subject to more pessimistic reports. Bundesbank, the central bank of Germany and the German component of the Eurosystem, last week indicated that the German economy could move toward a technical recession, meaning that reports which are yet to be released may show a decline for three consecutive months of this year, adding weight to the woes of 2023 in which Germany's economy was the worst performing major economy in the world.

Overall, there are more factors to consider in the immediate future than just the possibility that Europe's central bankers may follow the US in holding interest rates rather than cutting them - basically following the trail blazed by US monetary policy.

The US economy appears to be doing surprisingly well, with bank collapses and the debt ceiling having to be increased to mitigate the chances of a default appearing to have disappeared from the minds of the now optimistic, whereas Europe's slower reduction of inflation plus a possible forthcoming recession in the European Union's largest economic nation - Germany - appear to be dampeners.

Yes, the Euro has made some ground against the US Dollar in recent days, but given today's new home sales figure in the US plus the pessimism surrounding the Eurozone, it remains down compared to the highs of the end of last year.