- Greek parliament approved latest austerity measures – Hopes heightened for release of bailout funds at Eurogroup meeting
- Euro struggled to maintain uptrend after mixed Eurozone PMIs – Stronger German growth failed to prevent weaker Eurozone figures
- Widened UK public sector borrowing deficit may weaken Pound – EUR/GBP exchange rate could benefit from rise in new government debt
- US Dollar lacked support from manufacturing data – Weaker sector expansion lowered chances of imminent Fed rate hike
- Update: ZEW Results Mixed – Current Situation Improves, Economic Sentiment Falls
The Euro slid against the Pound (EUR/GBP) and US Dollar (EUR/USD) during the European session as Sterling was boosted by the latest EU Referendum poll results and the Euro was pressured by mixed ZEW economic sentiment/current situation reports.
Germany’s current situation gauge improved from 47.7 to 53.1, beating forecasts for a reading of 49.0.
However, the economic sentiment index for the Eurozone’s largest economy dropped from 11.2 to 6.4 while the measure for the Eurozone as a whole fell from 21.5 to 16.8.
The Euro to Pound Sterling (EUR/GBP) exchange rate was left trending in the region of 0.7666, down almost 1% on the day’s opening levels.
(Previously updated 8:30 am 24/05/2016)
IMF’s Greek Debt Relief Demands Weigh on Euro (EUR) Exchange Rate
Confidence in the Euro (EUR) weakened on Tuesday morning, despite expectations that the day’s Eurogroup meeting will see the unlocking of the next trance of Greek bailout funds. Investors are concerned that divisions between creditors appear to be deepening, with the IMF continuing to stress the need for ‘upfront and unconditional’ debt relief for the Hellenic nation. Consequently the Euro to Pound Sterling (EUR/GBP) exchange rate trended lower around 0.7705, while the Euro to US Dollar (EUR/USD) pairing was ceding ground in the region of 1.1188.
(Previously updated at 16:45 on 23/05/2016)
Hawkish Fed Commentary Dented Euro (EUR) to US Dollar (USD) Exchange Rate
A stronger-than-expected improvement in the Eurozone Consumer Confidence Index helped to maintain the gains of the Euro to Pound Sterling (EUR/GBP) exchange rate towards the close of Monday’s European session.
On the other hand, the Euro to US Dollar (EUR/USD) currency pair entered a downtrend following hawkish commentary from San Francisco Fed President John Williams. The policymaker suggested that two or three interest rate hikes before the end of the year could still be appropriate, increasing the appeal of the ‘Greenback’ in spite of weaker domestic data.
(Previously updated at 10:38 on 23/05/2016)
Euro (EUR) Boosted by Greek Bailout Hopes and Stronger German PMIs
Markets were generally relieved by the news that the Greek parliament had approved the latest raft of austerity measures mandated by creditors, pushing the Euro (EUR) higher against rivals. As a result, hopes have risen that Tuesday’s Eurogroup meeting could see finance ministers sign off on the next tranche of bailout funds, with the way paved for the conclusion of the current review. However, as the involvement of the International Monetary Fund (IMF) remains in question thanks to Germany’s stance on debt relief, further Euro volatility is likely.
Demand for the single currency was initially bolstered on Monday morning by a number of stronger-than-expected Eurozone PMIs, with Germany in showing solid growth and France edging further into expansion territory. More robust domestic growth raised confidence in the outlook of the Eurozone economy, reinforcing the likelihood of the European Central Bank (ECB) leaving monetary policy unchanged for the near future. However, this more optimistic outlook was soon undermined by the revelation that the Eurozone Composite PMI had slowed to a sixteen-month low of 52.9. As Chris Williamson, Markit Chief Economist, noted:
‘There are signs of improving life in the ‘core’ countries of France and Germany, led mainly by their service sectors, as manufacturing continued to struggle. However, elsewhere the rate of expansion slowed to its weakest for almost one-and-a-half years.’
‘Brexit’ Volatility Predicted to Remain Strong Influence on Pound Sterling (GBP) Exchange Rate
The Pound (GBP) remained on stronger form, meanwhile, with an absence of UK data not enough to discourage investors. However, with just a month to go before the EU membership referendum, bearish pressure on Sterling is expected to increase, encouraging markets to protect against the risk of a potential ‘Brexit’. While recent polls have suggested that the ‘Remain’ camp is drawing ahead of its ‘Leave’ rivals, faith in the accuracy of pollsters remains somewhat muted.
Tuesday’s public finance data could undermine the appeal of the Pound if new government debt is found to have widened markedly. Higher Public Sector Net Borrowing would be seen to increase the risks to the UK economy in the event of a ‘Brexit’. This would also reduce the chances of Chancellor of the Exchequer George Osborne meeting his pledge to eliminate the deficit before the end of the current parliament in 2020, further diminishing demand for Sterling.
UK data is fairly thin on the ground this week, but Thursday’s growth figures could have a notable impact on GBP demand.
US Dollar (USD) Softened ahead of Manufacturing PMI
Investors had been inclined to pile back into the US Dollar (USD) ahead of the weekend thanks to the increasingly hawkish tone of Fed policymakers. The latest Federal Open Market Committee (FOMC) meeting minutes raised the possibility that the central bank could resume its monetary tightening cycle as soon as June, providing domestic data remains supportive. Increasing doubts over the likelihood of such a move nevertheless saw the ‘Greenback’ retreat against rivals on Monday.
However, following an unexpectedly disappointing Philadelphia Fed Index, worries over the state of the US manufacturing sector have risen. Some of this concern could ease, though, if May’s US Manufacturing PMI indicates that expansion continued. A weaker figure could dent the odds of the Fed choosing to hike in June, on the other hand, as it would soften the outlook of the world’s largest economy.
Current EUR, GBP, USD Exchange Rates
At the time of writing, the Euro to Pound Sterling (EUR/GBP) exchange rate was trending lower at 0.7720, while the Euro to US Dollar (EUR/USD) pairing was trending narrowly around 1.1213. Meanwhile, the Pound Sterling to US Dollar (GBP/USD) exchange rate was making gains in the region of 1.4228.