Markets have been speculating that the European Central Bank (ECB) could be considering further monetary loosening measures, keeping the Euro to US Dollar exchange rate on a weaker footing.
- Underwhelming Eurozone manufacturing data diminished appeal of Euro – Fresh signs of domestic weakness suggested dovish policy outlook
- EUR USD exchange rate rallied on unexpectedly weak US manufacturing – Domestic data continued to paint mixed picture of world’s largest economy
- Hawkish Fed commentary offered support to US Dollar – Odds of imminent rate hike fluctuated further
- Volatility predicted in response to latest Non-Farm Payrolls report – Weaker showing could end talk of near term Fed tightening
The appeal of the US Dollar has remained in a state of flux thanks to the ongoing debate over the likelihood of the Federal Reserve raising interest rates before the end of the year.
Uninspiring Eurozone Manufacturing PMIs Discouraged Euro (EUR) Demand
The Euro (EUR) remained out of favour with investors on Thursday morning thanks to a disappointing raft of Eurozone Manufacturing PMIs. Sector growth was found to have slowed in both France and Italy, reigniting concerns over the uneven nature of the currency union’s recovery. Although the finalised German figure held steady at 53.6 this was not enough to outweigh the more bearish results, with the overall Eurozone measure being revised slightly lower as a result. This did not help to quell speculation that the European Central Bank (ECB) could be prompted to engage in further monetary easing, especially in the wake of August’s disappointing inflation data.
However, the Euro to US Dollar (EUR USD) exchange rate soon rallied in response to the ISM Manufacturing Index, which suggested weakness within the US economy. The measure slumped sharply from 52.6 to 49.4 on the month, prompting investors to sell out of the ‘Greenback’ (USD). Given the stated data-dependence of the Federal Reserve’s policy outlook this was seen to substantially dent the chances of an imminent rate hike, something that boosted the appeal of the EUR USD exchange rate markedly.
Hawkish Fed Commentary Prompted Modest USD Exchange Rate Recovery
Signs of weakness within the manufacturing sector were not enough to deter the hawkish rhetoric of Cleveland Fed President Loretta Mester. The policymaker commented that the case for moving away from low interest rates is ‘pretty compelling’, encouraging markets to speculate that the central bank could still be ready to hike rates in the near future. Given that Mester is a voting member of the Federal Open Market Committee (FOMC) her opinion carried greater weight with investors, allowing the US Dollar to regain some of its lost ground overnight.
Hopes are not particularly high for the latest Eurozone Producer Price Index, which is expected to offer further evidence of weakening inflationary pressure within the currency union. Price growth is expected to have slowed from 0.7% to 0.1% on the month in July, something which could diminish the appeal of the Euro further. If evidence continues to mount that the ECB’s earlier monetary stimulus has failed to boost the domestic economy then the EUR/USD exchange rate is likely to remain biased to the downside.
EUR USD Exchange Rate Forecast: Weaker Non-Farm Payrolls Predicted to Dent US Dollar
Significant volatility is expected for the EUR USD exchange rate in response to the afternoon’s Non-Farm Payrolls report, which is generally considered one of the most important economic measures in the Fed’s policy consideration. A strong enough showing here could see the odds of a September rate hike jump, taking the US Dollar with it. With expectations for the Unemployment Rate to drop from 4.9% to 4.8% the report could give the Fed the impetus needed to return to its monetary tightening cycle.
Even so, researchers at Deutsche Bank remain cautious of the result, noting:
‘Although trying to predict a fairly random number is a mugs game I would take the low side of the 180k consensus today (DB at 160k). A lot of people were a bit nervous about the seasonal distortion in last month’s strong report and, over the last 5 years the initially-reported August nonfarm payroll gains has consistently disappointed consensus and by an average of 52k.’
Should the headline figure fall short of market expectations the EUR USD exchange rate is likely to experience a fresh rally. If the labour market does not maintain its recent tightness then the ‘Greenback’ is set to fall back out of favour with investors, as the mixed outlook of the US economy would seem to preclude any imminent Fed rate hike.
Current EUR, USD Exchange Rates
At the time of writing, the Euro to US Dollar (EUR USD) exchange rate was trending lower in the region of 1.1188, while the US Dollar to Euro (USD EUR) pairing was making gains around 0.8936.