- Concerns over outlook of Eurozone economy persist – Soft Retail Sales dented Euro confidence
- Pound unable to sustain rally despite improved UK Services PMI – Signs of weakness still evident underneath stronger headline figure
- US Dollar slumped as Non-Farm Payrolls disappointed – Weak jobs growth diminished odds of imminent Fed rate move
- Speech from Fed’s Yellen forecast to provoke EUR/USD exchange rate volatility – Hawkish commentary unlikely to encourage ‘Greenback’ strength
‘Brexit’ Concerns Continued to Bolster EUR/GBP Exchange Rate
Although German Factory Orders proved disappointing in April this was not enough to put significant pressure on the Euro (EUR) on Monday morning. With ‘Brexit’ worries mounting once again the Euro to Pound Sterling (EUR/GBP) exchange rate continued to trend strongly higher in the region of 0.7882.
The latest polls have shown that the ‘Leave’ camp is garnering support. If reports continue indicating that the a ‘Brexit’ is increasingly likely, the Pound could extend losses.
The EU referendum vote is now less than three weeks away and debates are only likely to intensify as D-day draws closer.
As the European session continued the Euro was also supported by an increase in the Eurozone’s Sentix Investor Confidence Index for June.
The sentiment gauge advanced from 6.2 to 9.9, surpassing forecasts for a reading of 7.0.
Of course, today’s speech from Federal Reserve Chairwoman Janet Yellen is likely to cause notable EUR/USD and EUR/GBP exchange rate movement. Dovishness from the Fed official has the potential to send the Euro broadly higher.
(Previously updated at 17:08 03/06/2015)
Mixed Eurozone PMIs Failed to Weigh on Euro (EUR) Exchange Rate
Friday proved somewhat mixed for the Euro (EUR), with investors unimpressed by the latest raft of Eurozone Services and Composite PMIS. Although the Eurozone service sector reached a three-month high this was somewhat overshadowed by the downward revision of a number of the component PMIs, with Italy in particular demonstrating weakness. As the European Central Bank (ECB) had reiterated its dovish outlook on Thursday this naturally weighed on the appeal of the single currency, particularly as domestic Retail Sales were found to be equally disappointing.
However, demand for the Euro saw a sharp jump in response to the US Non-Farm Payrolls report as the chances of an imminent Fed rate hike were seen to slump significantly. As this seemed to reduce the likelihood of policy divergence between the ECB and Fed increasing in the near future at least the common currency made some bullish gains in response.
This confidence may struggle to maintain itself on Monday, though, as Eurozone data is expected to remain generally disheartening. German Factory Orders are forecast to have slowed in April while hopes are not especially high for the raft of domestic Retail PMIs. Should further signs of weakness in the currency union emerge the Euro is expected to return to a softer footing against rivals.
Pound Sterling (GBP) Struggled to Gain Traction after Stronger UK Services PMI
The appeal of the Pound (GBP) had been boosted somewhat by the news that May’s Services PMI had strongly bettered forecast. Rather than clocking in at 52.5 the figure instead rose further to 53.5, suggesting that the sector had grown more substantially in the last month. Given that the service sector is the single largest contributor to the UK’s economic activity this stronger showing would seem to encourage greater confidence in the outlook of the domestic economy. Nevertheless, the reaction from investors was muted, largely due to underlying weakness masked by the positive headline figure.
It is likely to be another slow start to the week for Pound Sterling, with little in the way of influential UK data ahead of Wednesday’s Industrial and Manufacturing Production figures. As a result demand for the currency is likely to remain primarily tied to ‘Brexit’-based speculation, with any particular developments in the referendum campaign expected to impact the Euro to Pound Sterling (EUR/GBP) exchange rate.
Weak Non-Farm Payrolls Slashed Fed Hike Odds and Softened US Dollar (USD)
While the US Dollar (USD) had gotten off to a somewhat optimistic start on Friday morning its limited gains were sharply reversed as a result of the poor Non-Farm Payrolls report. Expectations had been for a moderate increase of 160,000 so markets were particularly shocked to find that the actual figure was just 38,000. As this was the worse month of growth since September 2010 the odds of the Fed opting to tighten policy in June were seen to shrink back into single figures, severely diminishing demand for the ‘Greenback’.
Although investors no longer expect any change in monetary policy in the near future sentiment the US Dollar will nevertheless be focused on a speech from Fed Chair Janet Yellen on Monday. Investors will be particularly interested to gauge the policymaker’s reaction to this weak payrolls report, as strategists from TD Securities noted:
‘With the disappointing May employment report potentially removing any risk of a June hike, the market will be looking to Yellen’s speech for any clues on the threshold for both growth and employment to underpin the Fed’s confidence that the economic recovery is back on track.’
Any signs of hawkishness from Yellen are unlikely to particularly impact the Euro to US Dollar (EUR/USD) exchange rate, however, as the credibility of the Fed has been somewhat damaged by this recent misstep.