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EUR USD Stable after Services Data, But Will Rising Fed Bets Drive US Dollar Higher?

The Euro US Dollar (EUR USD) exchange rate trended flatly this morning following the release of a slew of services data from across the Eurozone.

Data compiled by global financial information and analysis firm Markit shows that the Eurozone’s private sector saw a bumper rise in February, with the most impressive jumps being in Spain and France which rose from 54.2 to 57.0 and 54.1 to 56.4 respectively.

The increase led to the overall Eurozone reading reaching a near six-year high, as it rose from 53.7 to 55.5 last month, and prevented the Euro from sliding further this morning.

Markets are also hopeful that the uptick in the Eurozone economy could prompt the European Central Bank to rethink its ultra-loose monetary policy, with analysts speculating that it could lead to a possible tapering of its quantitative easing programme.

However some analysts were less optimistic, with Howard Archer (chief European and UK economist at IHS Markit) forecasting that the upbeat data may be short lived, saying;

‘The markedly overall improved February purchasing managers’ surveys indicate that the Eurozone economy is seeing a robust first quarter of 2017… However, we suspect the Eurozone may find it difficult to kick on amid appreciable political uncertainties and likely reduced consumer purchasing power.’

This is especially true following the release of German retail sales figures earlier in the morning, which showed consumer spending actually contracted in at the start of the year.

The data appears to show that consumers may already be feeling the bite of the rapidly rising inflation rate, with sales contracting from 0.0% to -0.8% in January, falling well short of an expected 0.2% rise. This was the third consecutive month in which sales failed to show growth.

The report appears to been enough to discourage another rise in USD EUR however amid rising bets that the Federal Reserve will raise US interest rates later this month.

The odds of a March rate hike have more than doubled over the last week following hawkish comments from a number of Federal Reserve Monetary Policy (FOMC) committee members, with Fed Governor Lael Brainard suggesting that it would be ‘appropriate soon’ to raise rates.

The rising odds have also been supported by the recent uptick in US data, with initial Jobless Claims falling to a near 44-year low on Thursday.

With a strong labour market seen as a major indicator of a healthy economy, markets are becoming increasingly optimistic that a rate hike is imminent, with CME Group’s FedWatch tool currently putting the odds at 77.5%.

However an expected drop in the US Services PMI in February could put a slight dampener on market optimism, possibly leading to the US Dollar slipping later this afternoon.

Looking ahead to next week the EUR USD exchange rate may mount a recovery on Tuesday following the release of the latest Eurozone GDP report.

Economists forecast that growth in the Eurozone will tick up from 0.3% to 0.4% in the fourth quarter – potentially pushing the Euro higher.

However the single currency may also find itself under pressure from the upcoming Dutch elections, with it being seen as a major litmus test for how European voters will react to the rise of populism on the continent. A strong showing for far-right candidate Geert Wilder could open the door for more Eurosceptic movements to challenge the more established parties.

Current Interbank Exchange Rates

At the time of writing the EUR USD exchange rate was trending around 1.05 and the USD EUR exchange rate was trending around 0.94.