- Euro (EUR) climbs with market risk aversion – Chinese economy shows fresh signs of slowdown
- ‘Brexit’ concerns dent Pound (GBP) – Stronger house prices fail to encourage demand for Sterling
- US Dollar (USD) ends bull run – EUR/USD exchange rate strengthens after weak manufacturing survey
- Greek worries forecast to weigh on Euro demand – Eurogroup meeting deadline approaches
Disappointing US Manufacturing Survey Boosts EUR/USD Exchange Rate
Investors were surprised to find that the US Empire Manufacturing Index had contracted sharply in May, weakening from 9.56 to -9.02. This latest sign of weakness within the world’s largest economy saw the Euro to US Dollar (EUR/USD) exchange rate trending higher in the region of 1.1330. Some of the bearishness of the ‘Greenback’ was nevertheless muted on Tuesday morning by hopes of a stronger US CPI.
That hope proved justified as the rate of US inflation increased by 0.4% on the month in April (beating the 0.3% forecast) and climbed to 1.1% on the year, as expected.
US housing data was more mixed however and the EUR/USD exchange rate was able to advance by 0.2% to achieve a high of 1.1341 before the close of Tuesday’s European session.
On Wednesday the Eurozone’s final inflation data for April could cause some Euro to Pound and US Dollar exchange rate movement if the -0.2% annual figure originally estimated is revised.
Euro (EUR) Exchange Rate Weakens as Greece Set for Weekend Austerity Vote
While the Greek parliament is set to vote on its last round of creditor-imposed austerity measures over the weekend the Euro to Pound Sterling (EUR/GBP) exchange rate trended lower on Monday afternoon. Investors are concerned that Prime Minister Alexis Tsipras may struggle to get the bill through parliament with his slim majority, which could derail hopes for the Eurogroup to sign off on the latest tranche of bailout funds on the 24th May. Consequently the EUR/GBP pairing was slumped in the range of 0.7862 towards the end of the European session.
Safe-Haven Demand Supported Euro Uptrend
Weaker-than-expected Chinese data helped to bolster the Euro (EUR) at the start of the week. Sharp dips in Industrial Production and Retail Sales offered fresh evidence of weakness within the world’s second largest economy, prompting an increase in safe-haven demand. However, investors have remained somewhat reticent towards the single currency following Friday’s unexpected downward revision to the Eurozone’s first quarter GDP. With growth less robust than previously thought, the odds of further European Central Bank (ECB) intervention heightened.
Confidence in the Euro is unlikely to rise substantially over the coming days as the latest deadline for the signing off of the Greek bailout review approaches. With reforms still to be voted through parliament, there are worries that the Hellenic nation will not satisfy its creditors in time for the Eurogroup meeting on 24th May. Nevertheless, demand for the common currency could be boosted by the latest Eurozone trade balance figures and comments from ECB chief economist Peter Praet, particularly if the topic of further central bank easing is not raised.
EUR/GBP Exchange Rate Benefitted from ‘Brexit’ Worries
Markets showed little interest in Pound Sterling (GBP) on Monday morning, in spite of the Rightmove House Prices results matching forecast. Although house prices rose 7.8% on the year in May, this was not enough to encourage confidence in the wider UK economy. Recent warnings in the ‘Brexit’ debate from the Bank of England (BoE) and IMF have also been dragging on sentiment. After these offered an early boost in confidence that voters could be more inclined to vote to remain within the EU, the discouraging nature of the comments soon became more pronounced.
Investors are equally cautious ahead of Tuesday’s Consumer Price Index report, which is expected to show a slight weakening in UK inflation. With referendum uncertainty dragging on the domestic economy and the BoE adopting a more dovish position, a disappointing figure could prompt a sharp decline in Pound demand. Stronger inflationary pressure, however, may see the Euro to Pound Sterling (EUR/GBP) exchange rate cede ground.
US Dollar Unable to Maintain Bullish Form ahead of Manufacturing Data
The appeal of the US Dollar (USD) improved in response to both the latest Advance Retail Sales and University of Michigan Confidence Index results bettering expectations ahead of the weekend. With domestic sentiment appearing decidedly more upbeat this naturally raised suggestions that the Fed could still be on course to hike interest rates sooner rather than later, as analysts at ANZ noted:
‘In fact, combined with the ongoing improvement in the labour market and firmer core inflation and inflation expectations, one could argue that the better retail sales figures give the Fed ample ammunition to hike as soon as June (although the softer China data over the weekend is admittedly not helpful).’
This bullishness was ultimately short-lived, however, as the outlook of the Federal Open Market Committee (FOMC) remains less than clear. Expectations point towards the May Empire Manufacturing survey evidencing further sector weakness, as heightened concerns over the health of the global economy weigh on the odds of a nearer-term rate hike. A stronger showing, though, could see the ‘Greenback’ making renewed gains against rivals.
Current EUR, GBP, USD Exchange Rates
At the time of writing, the Euro to Pound Sterling (EUR/GBP) exchange rate was trending higher around 0.7881, while the Euro to US Dollar (EUR/USD) pairing was making gains in the region of 1.1322. Meanwhile, the Pound Sterling to US Dollar (GBP/USD) exchange rate was trending narrowly at 1.4364.