- Euro Dollar Exchange Rate Remains at 1.16 – Despite disappointing Eurozone inflation data
- US Dollar Held Back by Fed Uncertainty – US data continues to be strong
- EUR Forecast: German Unemployment Ahead – As well as final October Eurozone PMIs
- USD Forecast: Fed News in Focus – Fed decision on Wednesday, Chair announcement Friday
Updated 16:44 GMT 01/11/2017:
Thanks in part to the latest impressive US ecostats, the Euro Dollar exchange rate slipped as the Federal Reserve’s November policy decision approached.
ADP’s October US employment change figure came in higher than expected, at 235k.
While ISM’s October manufacturing PMI fell short of 59.5 forecasts, it still came in at a solid 58.7 which is an impressive figure overall.
As a result, markets are a little more confidence that the Federal Reserve will maintain its hawkish outlook.
However, EUR USD is unlikely to fall far until tonight’s and Thursday’s Fed news has all come in.
[Published 11:01 GMT 01/11/2017]
The Euro Dollar exchange rate has trended within a tight range since markets opened this week. Investors are hesitant to make any big moves on the pair until this week’s Federal Reserve developments have passed, amid market uncertainty about the outlook for the bank.
EUR USD began the week at the level of 1.1609 and has since edged just slightly higher, but so far no higher than Monday’s high of 1.1656. The pair is holding above the three-month-low of 1.1577 seen last Friday.
Euro (EUR) Strength Limited as Inflation Falls Short
The Euro has been unable to capitalise on limper US Dollar trade in recent sessions, as the latest Eurozone data has disappointed hawkish traders.
On Monday, Germany’s October Consumer Price Index (CPI) projection was published and fell short of expectations in both prints.
The monthly figure was forecast to remain at 0.1% but slipped to 0%. Meanwhile, the year-on-year report missed forecasts of sliding from 1.8% to 1.7% and instead dropped to 1.6%.
Due in part to the underwhelming German inflation data, the overall bloc’s inflation forecast also fell short of expectations in Tuesday’s report. The year-on-year inflation projection was expected to remain at 1.5% but slipped to 1.4%.
This made the Euro unappealing. In its October policy decision, the European Central Bank (ECB) forecast that inflation would slow in 2018 and this data seemed to support that.
As a result, investors hoping for the ECB to take a more hawkish stance on monetary policy within the foreseeable future were disappointed.
This is also why investors overlooked the Eurozone’s stronger-than-expected growth projection and unemployment rate data.
The Eurozone’s yearly Gross Domestic Product (GDP) report from Q3 is now projected to have risen from 2.3% to 2.5% in Q3, well above the previously predicted 2.1%.
Eurozone unemployment surprised by improving to 8.9%, with the previous figure revised from 9.1% to 9%.
US Dollar (USD) Weighed by Fed Uncertainty
Uncertainty about what tone November’s Fed decision will take, or what Fed Chair US President Donald Trump will pick to succeed Janet Yellen, have kept pressure on the US Dollar over the past week.
Despite high market confidence that the Fed will hike US interest rates for a third time this year in December, markets have their eyes set on Wednesday’s November Fed decision amid concerns that there is still space for the bank to delay its next rate hike.
On top of this, US President Donald Trump is expected to announce his pick for Federal Reserve Chair on Thursday.
It appears likely that Trump will buck tradition and not pick Chairwoman Janet Yellen for a second term.
Markets currently believe that Fed Governor Jerome Powell is the most likely pick. Like Yellen, Powell is relatively dovish and is likely to leave interest rates low, which could limit the US Dollar’s potential gains from the news.
Overall, uncertainty about what’s next for the Fed has prevented the US Dollar from benefitting from recent strong US ecostats.
Tuesday’s Chicago PMI from October came in well above 61 forecasts and rose from 65.2 to 66.2, and Monday’s PCE price index rose from 1.4% to 1.6% year-on-year.
Euro Dollar Exchange Rate Forecast: Fed News in Focus
Wednesday evening will see the Federal Reserve hold its November policy decision.
While markets do not expect any changes in policy from the decision, any changes in tone from the bank could have a major impact on US Dollar trade and the Euro Dollar exchange rate.
For example, if the Fed takes a more cautious tone on interest rates, this would cause a plummet in bets of a December rate hike and the US Dollar would plummet.
However, it is seen as widely likely that the Fed is preparing a December rate hike and as a result is more likely to indicate that a rate hike is on the table for next month.
In this scenario, the US Dollar is likely to see stronger performance – but perhaps not until US President Donald Trump’s Fed Chair announcement on Thursday.
If Fed Governor Jerome Powell does indeed get picked as the next Chair, the US Dollar outlook is unlikely to change much, but the relief of more certainty in the bank outlook would boost the ‘Greenback’ regardless.
Eurozone news is unlikely to influence Euro Dollar exchange rate trade much in the coming days following the disappointing inflation stats, but Germany’s unemployment report on Thursday could cause some movement.
EUR USD Interbank Rate
At the time of writing this article, the Euro Dollar exchange rate trended in the region of 1.1635. The US Dollar to Euro exchange rate traded at around. 0.7520.