- Update: EUR slumps on ECB Dovishness – Latest meeting minutes show policymakers concerned by Brexit
- Update: EUR USD Advances – Traders focussed on FOMC minutes, ignore strong ISM composite score
- EUR USD slips below opening levels – Eurozone data almost bilaterally weak
- Safe-haven investors prefer government bonds – ‘Safe’ currencies not safe enough
- Fed’s Dudley creates USD headwinds – Talks of ‘patience’ in regards to rate hikes
- EUR USD forecast – US ISM Composite and FOMC Minutes could undermine Euro further
Safe-haven demand is weak today, with concerns over ‘Brexit’ fallout and loose monetary policy weighing heavily on the EUR USD exchange rate. The Euro (EUR) has made marginal losses verses the US Dollar (USD), with further depreciation forecast considering the poor showing from the morning’s Eurozone data.
ECB Meeting Minutes Weaken Euro US Dollar Exchange Rate
The latest set of monetary policy meeting minutes from the European Central Bank (ECB) have revealed that policymakers are concerned by the impact a Brexit could have upon the Eurozone. The minutes showed that the 25 members of the Governing Council believed the UK’s decision could slow growth in the Euro area, describing it as ‘an important source of uncertainty’. EUR USD has slumped as a result.
(Last updated 16.48 July 7th)
EUR USD Climbs into Positive Territory despite Strong US ISM Score
The latest US ISM Non-Composite index has performed better-than-expected, printing at 56.5 instead of 53.3 as forecast. The index had previously clocked in at 52.9. The news has failed to strengthen the US Dollar, however, with the Euro making gains of 0.2%. US investors are eyeing the upcoming Federal Open Market Committee (FOMC) meeting minutes from June, keeping the ‘Greenback’ weak in the interim.
(Latest updated 16.48 July 6th)
Weak German Factory Orders Figure Weighs on Euro, EUR USD Struggles around Opening Levels
A below-forecast reading from the German factory orders report for May has added to the Euro headwinds created by general market sentiment today. Safe-haven currency demand is firmly off, with the Euro, US Dollar, Swiss Franc (CHF) and Japanese Yen (JPY) all in a position of weakness.
In investment terms, however, there is still a strong demand for safe assets. It seems traders have been polarised since the UK voted in favour of leaving the European Union. Risk appetite is evidenced by the performance of the commodity assets today, yet many bond yields remain negative. The German two, five and ten year Bunds have seen yields frozen in negative territory; US Treasury yields, while still positive, continue to decline.
The Japanese 30 year bond yield has dropped -0.01% to just 0.04%, edging close to bringing it into negative territory along with the Japanese two, five and ten year bonds. If this falls negative, it means that investors are so desperate for safe-havens for their money that they will pay the Japanese government in order to lend it money until 2046.
Safe-haven currencies, however, appear not to be secure enough for investors. The Euro is mixed as a result, making strong gains against currencies dragged lower by domestic weakness, with soft gains or small losses prevalent across the board.
The day’s data has not helped improve Euro appetite. German factory orders showed no growth in May on a seasonally-adjusted basis, despite predictions of an acceleration out of contraction territory to 1%. On a non-seasonally adjusted basis, orders declined -0.2% – a slowdown on the previous month’s decline, but significantly below the 0.9% growth forecast.
Today’s Markit PMIs have been equally disappointing. The French retail index was the only measure to rise, climbing from 50.6 to 51.0. Eurozone retail contracted in June, with the index falling from 50.6 to 48.5, while German retail dropped from 54.0 to 51.6. Italy’s retail PMI dropped even further into contraction, sliding -5 points to 40.2.
US Dollar Mixed after Fed’s Dudley Comments Weaken Rate Hike Bets
It would take a remarkable turn of events for the Federal Reserve to implement its initial plan of hiking interest rates four times during the course of 2016. Bets of further monetary tightening from the Federal Open Market Committee (FOMC) have slipped even lower since the UK’s vote for Brexit on the 23rd of June. Previous concerns of overvaluation had already softened Fed rate hike bets.
Comments from the Fed’s William Dudley, one of Fed Chair Janet Yellen’s closest allies, yesterday evening further weakened hopes of policy normalisation before the end of the year. In contrast to recent comments made by Fed official John Williams, that the US economy will be largely unharmed by the ‘Brexit’, Dudley described the UK’s decision as ‘one of the biggest’ issues on the horizon for the US economy. Speaking to community and business leaders in New York, Dudley observed;
‘If there are broad contagions in financial markets, and if it leads to greater questions about the stability of the European Union, then it would have more severe consequences.’
He further noted that;
‘With uncertainties about the outlook and inflation being lower than desired, it allows us to be a little more patient. If you strip out the energy sector, inflation is still a little below what we would like… so that allows us to be patient in terms of letting the economy run with accommodative monetary policy in place. If inflation were higher … we could probably be a little more aggressive in terms of monetary policy.’
There are currently no market expectations of a rate hike in July, with anticipation of a cut to 0.25% creeping up from 2.4% yesterday to 3.6%. Markets see an 82.5% chance that interest rates will be the same as they are currently by the end of the year, with a 13.9% chance of a 0.25% hike and 0.6% chance of interest rates being raised to 1%. There is still a 3% chance rates will have been cut, which is the lowest probability of further monetary loosening for any remaining policy meeting this year.
Euro US Dollar (EUR USD) Exchange Rate Forecast; Downside Risks to Euro from US ISM Composite
With Eurozone data all released for today, only US reports remain to provide an internal influence upon EUR USD. Key amongst these will be the US ISM Non-Manufacturing Composite for June, which is expected to tick higher from 52.9 to 53.3. This could finally give the ‘Greenback’ enough strength to make solid gains verses the common currency.
Also due out later are the minutes from the FOMC’s June policy meeting. Traders will eagerly await these to see if they hold any clues as to how the Fed as a whole views ‘Brexit’ risks to the US economy. If the Fed is hawkish on this issue, the US Dollar will likely get a boost, while a dovish committee could further undermine confidence in the ‘Buck’.
Current EUR USD Exchange Rates
The Euro US Dollar (EUR USD) exchange rate is currently trading between 1.1034 and 1.1080, while the US Dollar Euro (USD EUR) exchange rate is trending in the region of 0.9024 to 0.9058.