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Euro Pound, US Dollar Exchange Rates Softened as Fed Rate Hike Odds Rose

The appeal of the Euro generally weakened on Tuesday morning as worries over Greece mounted and the odds of an imminent Federal Reserve interest rate hike increased.

  • German industrial production showed contraction in December – Confidence in Eurozone’s powerhouse economy weakened
  • Hard Brexit fears weighed on Pound Sterling – Investors concerned by lack of passed amendments to Article 50 bill
  • Fed rate hike expectations boosted US Dollar demand – Philadelphia Fed President put March move back on the table
  • Greek bailout and French elections in focus – EUR rates could trend lower on rising political risk

While the Pound remains muted by concerns relating to Brexit the EUR GBP exchange rate has struggled to make any particular gains thanks to the deteriorating domestic political climate.

Disappointing German Data Weighed on Euro (EUR) Outlook

As German industrial production was found to have unexpectedly contracted in December the Euro (EUR) remained under pressure on Tuesday morning. This weaker showing offered further indication that the Eurozone’s powerhouse economy is in a less robust state than previously hoped, undermining confidence in the single currency further. Rising tensions over Greece’s bailout and worries that political risk is on the rise within the currency union as a whole both added to the bearish mood.

Support for EUR exchange rates may diminish further if Thursday’s German trade data proves discouraging. Forecasts point towards a sharp narrowing of the trade surplus from 22.6 billion to 20.5 billion in December, which could confirm that economic growth faltered at the end of 2016. If exports are found to have contracted this could prompt fresh Euro weakness, highlighting the difficulties that face the German economy and its increasing reliance on domestic demand.

Brexit Worries Limited EUR GBP Exchange Rate Weakness

Even so, the Euro Pound (EUR GBP) exchange rate remained on a narrow trend thanks to the relative weakness of Sterling. January’s Halifax house price index showed a surprising contraction on the month, indicating that the domestic housing market slowed at the start of the year. This exacerbated the bearish mood surrounding the Pound on Tuesday, with investors also put out by MPs early failure to pass any amendments on the Article 50 bill. With guarantees of greater parliamentary scrutiny and devolved assembly involvement in the negotiation process thrown out, worries over the prospect of a hard Brexit intensified.

If the RICS house price balance also provides evidence of a weakening market the EUR GBP exchange rate could be encouraged to make stronger gains. Focus on Brexit and the debate in Parliament are also likely to limit the strength of Sterling in the near future. Should the government succeed in pushing through its bill without any meaningful amendments then the Pound is expected to remain under pressure, as this would be seen as granting Theresa May an effective blank cheque.

US Dollar (USD) Boosted by Increased Odds of March Fed Hike

Confidence in the US Dollar (USD) rebounded early in the week as a result of unexpectedly hawkish commentary from Philadelphia Fed President Patrick Harker. The policymaker noted that March ‘should be considered’ for another interest rate hike, raising the odds of imminent policy action from the Federal Reserve. This was slightly at odds with the more dovish tone of the recent Federal Open Market Committee (FOMC) policy meeting, but nevertheless helped the ‘Greenback’ to trend higher across the board.

December’s US trade balance figure could see the Euro US Dollar (EUR USD) exchange rate extending its losses, with the deficit forecast to have narrowed modestly to -45 billion. Any signs of sustained strength within the US economy would add weight to expectations for the Fed to resume its tightening push sooner rather than later. However, if the latest consumer credit data suggests that sentiment is weakening this may limit the upside potential of the US Dollar, particularly if political developments remain discouraging.

Current Interbank EUR GBP, EUR USD Exchange Rates

At the time of writing, the Euro Pound (EUR GBP) exchange rate was trending narrowly around 0.86, while the Euro US Dollar (EUR USD) pairing was slumped in the region of 1.06.