Although German producer prices showed a solid uptick in August this was not enough to prevent the Euro returning to a general downtrend.
While this positive data suggests that inflationary pressure within the Eurozone’s powerhouse economy is continuing to build the odds of any increased European Central Bank (ECB) hawkishness remain limited.
As policymakers are unlikely to take this latest increase in producer prices as a sufficient signal of rising inflation the outlook for EUR exchange rates failed to improve, with the prospect of imminent policy tightening still unclear.
With markets also bracing for tonight’s Federal Reserve policy decision investors saw little reason to favour the Euro at this juncture.
The mood towards the single currency could improve, however, in response to the release of the latest ECB Economic Bulletin on Thursday.
If this points towards a greater level of optimism amongst ECB policymakers then the Euro Australian Dollar exchange rate could rally strongly.
Any indications that the central bank could start tapering its quantitative easing program sooner rather than later are likely to significantly boost the appeal of the Euro.
However, if ECB President Mario Draghi continues to adopt a more dovish tone in a speech in Frankfurt this is likely to extend the losses of EUR exchange rates further.
Hawkish RBA Outlook Supports Australian Dollar Demand
In the wake of the relatively hawkish message of Tuesday’s Reserve Bank of Australia (RBA) meeting minutes the Australian Dollar has made solid gains against many of the majors.
This diminished the negative impact of a disappointing Westpac leading index figure, which pointed towards a loss of momentum within the domestic economy.
Even so, as Bill Evans, Chief Economist at Westpac, noted:
‘The growth rate remains negative for a third consecutive month pointing to below trend momentum and a sharp turnaround from strong positive, above trend reads at the start of the year.
‘While the Index only gives us a glimpse of the likely momentum in the first few months of 2018 it currently seems to be more consistent with our view of the likely growth environment next year than the Reserve Bank’s forecast for growth comfortably above trend.’
If further signs point towards weaker underlying fundamentals then markets are likely to discount the likelihood of the RBA maintaining its more optimistic view of the domestic economy.
As a result the Australian Dollar remains vulnerable to downside bias in the near term.
Commentary from RBA Governor Philip Lowe will also be in focus overnight, with any dovish noises likely to spook investors and boost the EUR AUD exchange rate.
Current EUR AUD Interbank Exchange Rates
At the time of writing, the Euro Australian Dollar exchange rate was slumped in the region of 1.4928. Meanwhile, the Australian Dollar Euro exchange rate was making solid gains around 0.6698.