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Euro Australian Dollar (EUR/AUD) Exchange Rate Pressured by Strong Australian Growth

Euro Australian Dollar (EUR/AUD) Exchange Rate Weakens on Bullish Australian Growth

An unexpectedly strong uptick in the first quarter Australian gross domestic product figures left the Euro to Australian Dollar (EUR/AUD) exchange rate on a weaker footing.

Markets were pleasantly surprised to find that growth had accelerated to 3.1% on the year in the first quarter of 2018, boosting confidence in the health of the Australian economy.

This encouraged the Australian Dollar (AUD) to trend sharply higher across the board on Wednesday, even though risk appetite remains limited.

However, the Reserve Bank of Australia’s (RBA) decision to leave interest rates on hold for a twentieth consecutive meeting in June muted the upside potential of AUD exchange rates.

With policymakers still looking set to leave monetary policy on hold for some months to come the EUR/AUD exchange rate saw limited losses.

Stronger Eurozone Retail Sector Limits EUR/AUD Exchange Rate Downside

The Euro to Australian Dollar (EUR/AUD) exchange rate also found support on the back of better-than-expected Eurozone PMIs.

Both the German construction PMI and the latest raft of Eurozone retail PMIs proved stronger than forecast, showing solid improvement on the month.

This gave investors fresh cause for confidence in the outlook of the Eurozone economy, suggesting that activity has picked up somewhat in the second quarter.

With the Eurozone retail sector returning to a state of expansion in May the mood towards the Euro (EUR) generally improved on Wednesday morning.

Even so, as recent signs from the manufacturing and service sectors have proved weaker EUR exchange rates struggled to make significant gains.

Euro Australian Dollar (EUR/AUD) Exchange Rate Volatility Forecast on ECB Comments

Commentary from European Central Bank (ECB) policymakers could provoke additional volatility for the Euro to Australian Dollar (EUR/AUD) exchange rate this week.

Any signs of increased hawkishness may offer the Euro a solid rallying point ahead of the weekend, boosting hopes that the ECB could return to a tightening bias in the coming months.

However, the prospect of any major shift at the ECB’s June policy meeting looks slim, as researchers at Danske Bank commented:

‘We remain sceptical that the ECB will change its communication on its asset purchase programme already, especially given the latest bout of weak indicators of euro area economic activity and wobbly market sentiment relating to the new government in Italy. We see a good chance that the ECB’s growth projections will be revised down while headline inflation will be revised slightly up on the back of higher oil prices.’

If policymakers maintain a more dovish outlook on monetary policy this could see EUR exchange rates come under renewed pressure.

A narrowing of the German trade surplus may also weigh on the Euro to Australian Dollar (EUR/AUD) exchange rate in the near term.