After a solid raft of German data Euro exchange rates have remained on a generally stronger footing, particularly benefitting against the softened Pound.
- Rising German exports improved appeal of Euro – Confidence in outlook of Eurozone’s powerhouse economy boosted
- Higher odds of hard Brexit boosted EUR GBP exchange rate – Fears that the UK will lose access to the single market increased
- US Dollar gains forecast on stronger wholesale inventories data – Fresh signs of economic strength expected
- ECB meeting minutes could hamper single currency strength – Policymakers likely to maintain dovish view on monetary policy
With market risk appetite faltering the US Dollar has found some support, setting the EUR USD exchange rate on a narrow trend.
Dovish ECB Minutes Predicted to Dampen Euro (EUR) Outlook
It was a solid start to the week for the Euro (EUR), which was boosted by better-than-expected German trade and production data. A marked widening of the German trade surplus indicated that the Eurozone’s powerhouse economy remains in robust health, showing a particularly reassuring uptick in exports. The positive impact of this data was a little limited by speculation over the prospect of early Italian elections; something which could hamper the single currency and throw the future of the Eurozone into doubt once again. Even so, Euro exchange rates were trending generally higher on Tuesday.
Volatility could be in store for the single currency with the release of the European Central Bank’s (ECB) December meeting minutes. Investors will be looking for some sign that policymakers are adopting a more hawkish view on monetary policy, increasing the odds of the quantitative easing program being tapered sooner rather than later. However, researchers at HSBC do not expect the ECB to move away from its easing bias imminently, noting:
‘The majority of the Governing Council remain worried about muted underlying price pressures, despite the rise in headline inflation. Core and services inflation remain around 1%. As noted recently by ECB board member Ives Mersch – typically at the more hawkish end of the spectrum within the ECB Governing Council – wage growth is still too weak in the Eurozone. The ECB will also be wary of tightening monetary policy too soon, repeating the mistake of 2011 when it hiked rates, helping to curb the fragile recovery.’
GBP Exchange Rates Under Pressure from Hard Brexit Speculation
Confidence in the Pound (GBP) plunged in the wake of comments from Prime Minister Theresa May, who noted that the government did not intend to keep ‘bits’ of EU membership. This prompted a resurgence in market fears of a hard Brexit, with investors dismayed by the implication that the UK could lose its current level of privileged access to the single market. Although May later denied that she had ruled anything out, this was not enough to halt the gains of the Euro Pound (EUR GBP) exchange rate.
While Brexit-based jitters are likely to keep Sterling on a weaker footing for the foreseeable future Wednesday’s raft of production data could offer some measure of support. Forecasts point towards a modest recovery in output, which could encourage greater confidence in the outlook of the domestic economy. Even so, with the visible trade deficit expected to have widened further in November the Pound may struggle to recover from its current downtrend. A weak showing here would underline worries regarding the vulnerability of the UK economy post-referendum, with the sharp decline of the Pound making the deficit a greater liability going forward.
Strong Wholesale Inventories Forecast to Soften EUR USD Exchange Rate
The outlook of the US Dollar (USD) was mixed on Tuesday morning, struggling to capitalise on an unexpected weakening in Chinese inflation. While markets are still largely confident in the prospect of a Donald Trump presidency and increased infrastructure investment, appetite for the ‘Greenback’ has weakened somewhat. There was some disappointment that Atlanta Federal Reserve president Dennis Lockhart continued to view the path of monetary tightening as ‘gradual’, even though the odds still favour multiple interest rate hikes in the coming year.
Expectations are positive for November’s wholesale inventories data, which is forecast to show a solid uptick on the month. Further signs of robustness within the US economy would offer investors fresh incentive to pile into the US Dollar, to the detriment of the Euro US Dollar (EUR USD) exchange rate. However, any increase in domestic political worries could limit the strength of the ‘Greenback’ in the near term.
Current Interbank Exchange Rates
At the time of writing, the Euro Pound (EUR GBP) exchange rate was trending higher at 0.87, while the Euro US Dollar (EUR USD) pairing was trending narrowly in the region of 1.05.