Rather than improving modestly as forecast the latest IFO Business Sentiment Survey showed a weakening in confidence within the German economy, although this failed to particularly weigh on Euro exchange rates.
- Euro appeal muted by discouraging dip in German business confidence – Worries remain over outlook of the Eurozone’s powerhouse economy
- Limited Brexit-based worries continued to benefit Pound – GBP shrugged off less encouraging mortgage data
- ‘Greenback’ weighed down by soft US housing data – Investors reluctant to price in higher odds of 2016 Fed rate hike
- EUR exchange rate volatility forecast ahead of Jackson Hole Symposium – Hawkish commentary from Fed Chair could prompt Euro downtrend
Mixed US Data Extended EUR USD Exchange Rate Rally
A stronger-than-expected US Durable Goods Orders result for July was quickly counteracted by a disappointing Services PMI. This prevented the US Dollar from making any substantial gains against the Euro, with markets still uncertain over the outlook of the world’s largest economy. As a result the EUR USD exchange rate continued to trend higher towards the close of the European session at 1.1275, while the EUR GBP pairing extended its uptrend in the region of 0.8556.
(Previously updated at 11:05 on 25/08/2016)
The relative weakness of the US Dollar has offered additional support to the Euro in recent days, with the ‘Greenback’ struggling as investors anticipate comments from Fed Chair Janet Yellen.
Disappointing IFO Business Sentiment Survey Dented Euro (EUR) Demand
Despite German exports bettering forecast, clocking in at 1.2% rather than 0.7% in the second quarter, demand for the Euro (EUR) faltered on Wednesday. Investors were discouraged to see that investment within the Eurozone’s powerhouse economy had contracted sharply in the last quarter, something which suggests greater slowing could be imminent. With much of the currency union’s strength driven by Germany this disappointing showing prompted the single currency to cede further ground to its rivals. As Time Riddell, research analyst at Westpac, noted:
‘The August dearth of official commentators and the lack of decent hard data next week keep the focus on survey data from Germany and the EU. Recent data has been sound, but little more. EUR/USD has drifted from its attempts to reach perceived range resistance in the 1.14s. EUR/GBP has started to retrace some of its post-Brexit gains.’
Confidence in the Euro faltered further in response to August’s German IFO Business Sentiment Survey, which failed to show the modest improvement that markets had expected. Rather, confidence weakened sharply, with the current assessment measure falling from 114.8 to 112.8 and the expectations index dipping from 102.2 to 100.1. This does not seem to bode overly well for the outlook of the German economy, suggesting that conditions are not as robust as investors might have hoped. Nevertheless, the Euro has continued to benefit from the weakness of its rivals on Thursday morning.
Pound (GBP) Forecast to Rally on Improved CBI Reported Sales
Demand for the Pound (GBP) remained bullish, meanwhile, as markets remained confident that the UK economy has shrugged off at least the initial impact of the Brexit vote. This was in spite of the BBA Loans for House Purchase figure falling further than forecast, an indication that borrowing had stalled more markedly in July. Nevertheless, investors maintained an optimistic outlook with regards to the domestic housing market, which is expected to bounce back if uncertainty fades further. Consequently the Euro to Pound (EUR GBP) exchange rate extended its slump, falling to a three-week low of 0.8488.
Sterling was unable to maintain its bullish run for long, however, with little to dissuade a fresh round of profit taking. Some of its strength could be regained if the CBI Reported Sales results offer further evidence of a more limited post-referendum deterioration in conditions. Forecasts are for retail sales to have strengthened from -14 to 0 in August, a signal which would encourage greater optimism in the outlook of the domestic economy. Any shortfall, on the other hand, would give the EUR GBP exchange rate an additional rallying point.
EUR USD Exchange Rate Boosted by Weaker Fed Hike Expectations
Markets have continued to move away from the US Dollar (USD) this week, with investors reluctant to price in any higher odds of the Federal Reserve raising interest rates before the end of the year. This cautious approach has been encouraged by a raft of disappointing US housing data, with Existing Home Sales showing a particularly concerning contraction of -3.2% in July. With the picture in the world’s largest economy looking less robust than might be expected, the hawkish tone of policymakers in recent comments appears to be less founded. Even so, with speculation still rampant, the Euro to US Dollar (EUR USD) exchange rate has remained on a volatile footing.
The appeal of the ‘Greenback’ could pick up on Thursday afternoon if the latest Durable Goods Orders figure proves encouraging. Expectations are for a strong rebound from -3.9% to 3.4%, suggesting that confidence among consumers had risen in July. This could encourage greater demand for the US Dollar, although markets are likely to remain in a muted mood ahead of a speech from Fed Chair Janet Yellen at the Jackson Hole Symposium. Hawkish comments would increase the odds of an imminent rate hike, although Yellen could just as easily adopt a more dovish outlook on monetary policy.
Current EUR, GBP, USD Exchange Rates
At the time of writing, the Euro to Pound (EUR GBP) exchange rate was trending higher around 0.8540, while the Euro to US Dollar (EUR USD) pairing on an uptrend in the region of 1.1287.