- USD Weakens despite Fed Hike Bets – Markets now pricing in rate increase by December
- Euro boosted by IFO scores – German business sentiment remains strong
- EUR USD exchange rate holds opening levels – Advancing USD keeps Euro gains in check
- US Dollar strengthens – Markets hoping for stronger Fed outlook
- EUR USD forecast – Exchange rate could firm thanks to weakening US confidence
Positive German business sentiment scores helped keep the Euro US Dollar exchange rate within opening levels, despite upside pressures for the ‘Greenback’.
EUR USD Advances in Spite of Increased Fed Rate Hike Bets
The Fed Funds futures market is now pricing in tighter US monetary policy in December. After previously allocating a 55% likelihood that rates would still be in their current range by the end of year, bets have increased overnight. There is now a 42.8% chance that rates will be in the 0.5-0.75% range and an 8.7% chance of rates in the 0.75-1.00% range by the end of the year. Despite this, EUR USD has remained strong.
(Last updated at 09.54, 26/07/16)
German Ifo Surveys Boost Euro as Business Confidence Holds following Brexit
The UK’s Brexit decision did not deliver quite the knock to German business confidence many were expecting, according to the latest surveys from Ifo. Assessment of the Business Climate in July slipped just -0.4 points down to 108.3, instead of the -1.2 point drop anticipated. Expectations weakened from 103.1 to 102.2, but this result was better than the score of 101.6 that had been forecast. The Current Assessment index performed even better, increasing against expectations from 114.6 to 114.7.
Professor Dr Clements Fuest, President of the Ifo Institute, explains;
‘Sentiment in the German economy weakened slightly in the wake of the Brexit referendum. The Ifo Business Climate Index fell from 108.7 points in June to 108.3 points in July. This was due to far less optimistic business expectations on the part of companies. Assessments of the current business situation, by contrast, improved slightly. The German economy proves resilient.’
Speaking of the findings, Berenberg bank Economist Florian Hense, commented;
‘Ifo survey data for July beat expectations across the board – showing no real signs of an impact from the Brexit vote. German businesses seem to be handling the current period of political uncertainty well. For the time being, it seems almost like business as usual for the German economy, implying a moderate, but steady pace of expansion for the rest of the year driven by strong underlying fundamentals.’
US Dollar Soft Ahead of Federal Reserve Policy Meeting
The approaching Federal Reserve policy meeting tomorrow and a series of high-risk events in the near future kept the US Dollar weak yesterday. Investors held back, adopting the ‘wait-and-see’ approach currently favoured by many of the world’s central banks. While there is little hope that the Federal Open Market Committee (FOMC) will raise interest rates at the coming meeting – the futures market has currently priced in just a 2.4% chance of further tightening tomorrow – the recent positive domestic data releases have improved confidence in the domestic economy.
Investors are now expecting the Federal Reserve will be more upbeat in their accompanying statement, which would increase bets that the normalisation cycle will be resumed before the end of the year. Markets are currently pricing in a 44% chance of tighter policy by December, so it wouldn’t take much hawkishness on the part of the FOMC for the markets to believe a hike was more likely than not by yearend.
In a forecast released on Sunday, Morgan Stanley noted;
‘NFP was strong on the headline but underlying details were weaker, good enough to reduce fears of a recession but not strong enough to bring the Fed back into play. However, in light of some better than expected data, we are watching next week’s Fed meeting closely for any sign they adjust market expectations upward for rate hikes this year.’
Euro US Dollar (EUR USD) Exchange Rate Forecast; Will Weakening Consumer Confidence Boost Euro?
There is no Eurozone data due for release today, leaving the Euro to react to external developments and market sentiment.
There is plenty of US economic data on the calendar, including the Markit services and composite PMIs and new home sales figures. The biggest motivator of exchange rate movement is likely to be the consumer confidence index for July, which is currently forecast to weaken from 98 to 95.5.
EUR, USD Conversion Rates
The Euro US Dollar (EUR USD) exchange rate traded in the region of 1.0975 during yesterday’s European session, while the US Dollar Euro (USD EUR) exchange rate trended around 0.9110.