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Euro Australian Dollar (EUR/AUD) Exchange Rate Struggles on Disappointing Eurozone Inflation

Trade War Concerns Provoke Euro Australian Dollar Exchange Rate Volatility

Even though the Eurozone consumer price index core failed to pick up as forecast in March the Euro to Australian Dollar (EUR/AUD) exchange rate was able to hold its ground.

This was largely due to the latest wave of market jitters over the prospect of a US-China trade war, which weighed heavily on the risk-sensitive Australian Dollar (AUD).

With both the US and China lining up fresh tariffs there are naturally concerns over the likely impact of this latest escalation in tensions on the health of the wider global economy.

Demand for the risk-sensitive AUD naturally diminished in the wake of these fresh developments, helping to limit the downside potential of the EUR/AUD exchange rate on Wednesday.

Falling Eurozone Unemployment Limited EUR/AUD Exchange Rate Losses

The EUR/AUD exchange rate also found support from the latest Eurozone unemployment rate, which dipped from 8.6% to 8.5% in line with forecast.

Investors greeted this latest sign of strengthening within the domestic labour market, although employment remains a far cry short of its pre-financial crisis levels even so.

However, as Bert Colijn, Senior Economist at ING, noted:

‘Labour market conditions continue to tighten with lower unemployment and higher vacancy rates. Unemployment was at 8.5% in February, which is the lowest rate in nine years. Still, with wage growth not showing a meaningful increase, the transmission to price pressures is taking even longer than we were expecting.

‘Nothing in this release seems to justify a more hawkish ECB.

‘A decision about QE is the next big thing to focus on, and with inflation like this, another extension seems to be in the making.’

With the odds of any imminent shift in the outlook of the European Central Bank (ECB) looking distinctly slim this kept the Euro (EUR) under a degree of pressure.

Narrowed Australian Trade Surplus Forecast to Dampen Australian Dollar Potential

Tonight’s Australian services PMI result could dent the EUR/AUD exchange rate, providing that the sector demonstrates fresh signs of strength.

Focus will also fall on February’s Australian trade balance figure, with forecasts pointing towards a moderate narrowing of the trade surplus on the month.

If market fears over the global economic outlook continue to mount this could exacerbate the impact of a weaker trade balance, leaving the Australian Dollar on a generally softer footing.

However, any indications that the US and China may back down from entering a full-blown trade war could see AUD exchange rates pushing higher once again.

Demand for the Euro, meanwhile, could deteriorate further tomorrow if the latest Eurozone producer price index data adds to evidence of weaker domestic inflationary pressure.

As forecasts suggest a stagnation in producer prices on the month this could see the EUR/AUD exchange rate sliding lower on Thursday.