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Euro Exchange Rates Softened by Weak German Services PMI

Demand for the Euro has been muted thanks to the more dovish tone of the European Central Bank (ECB), with a weaker-than-expected German Services PMI giving investors little cause for confidence.

  • Disappointing German Services PMI dented Euro – Markets concerned by sign of weakness from Eurozone’s powerhouse economy
  • GBP volatile on Supreme Court ruling – Threat of Scottish independence referendum dampened Sterling enthusiasm
  • Political worries drive US Dollar outlook – Lack of economic plans diminish appeal of ‘Greenback’
  • Stronger German business sentiment forecast to boost EUR rates – Greater optimism to encourage single currency uptrend

While the EUR GBP exchange rate saw some sharp moves in response to the Supreme Court ruling on Article 50 the Euro struggled to make gains against the US Dollar, despite a rising sense of political risk.

Mixed Eurozone PMIs Dampened Euro (EUR) Demand

January’s raft of Eurozone PMIs proved to be something of a mixed bag, with the French figures bettering expectations in contrast to a disappointing German Services PMI. While the Eurozone manufacturing sector appeared to remain in a resilient state of growth the dip in service sector strength proved discouraging. As much of Germany’s recent growth had been driven by consumer spending this indication of weakness did little to improve the appeal of the Euro (EUR), which trended lower as a result.

The German IFO business sentiment survey for January could offer some measure of encouragement to the single currency, however. Signs of stronger business confidence within the Eurozone’s powerhouse economy should encourage EUR exchange rates to rally, particularly if the economic expectations measure proves bullish. While hopes of the European Central Bank (ECB) adopting a more hawkish outlook in the near future have been dampened any indication of the domestic economy’s continued resilience would boost the appeal of the Euro.

Supreme Court Judgement Prompted Fears of Second Scottish Referendum

Sterling (GBP) saw some volatile movement in the immediate aftermath of the Supreme Court’s ruling on the Article 50 case, with the reaction to the statement somewhat mixed. Investors were discouraged by the judges’ decision that the government does not need the approval of the devolved assemblies in order to leave the EU, although an Act of Parliament is required. This raised the prospect of Scotland pushing ahead with a second independence referendum; a prospect which is not seen as positive for the Pound. Consequently, the Euro Pound (EUR GBP) exchange rate made some moderate gains on Tuesday morning.

Further Pound weakness could be in store if the fourth quarter UK Gross Domestic Product figures prove disappointing. Forecasts point towards a slight moderation in growth, which is expected to have slowed from 0.6% to 0.5% on the quarter. Any suggestion of weakening momentum could weigh heavily on Sterling, helping to push the EUR GBP exchange rate higher.

Worries over US Protectionism Drive EUR USD Exchange Rate Volatility

Political jitters weighed heavily on the US Dollar (USD) at the start of the week, as markets began to adjust to the realities of the new US administration. Investors have been disconcerted by the continued lack of clear economic plan from Donald Trump, leading the ‘Greenback’ to surrender some of its post-election gains. With concerns mounting over the protectionist and isolationist rhetoric now being espoused by the White House the Euro US Dollar (EUR USD) exchange rate was prompted to return to an uptrend.

While the US Dollar could find some support on the back of an improvement in the Manufacturing PMI, which is forecast to have edged up from 54.3 to 54.5, any positive impact is likely to be limited. The outlook of the ‘Greenback’ looks set to remain primarily tied to political developments for the foreseeable future, thanks to the unpredictable nature of the administration. However, as Michael Every, Head of FMR at Rabobank, noted:

‘It looks like many firms will soon have to decide which side of the US border their production is going to be on. Given the market response to that idea – as opposed to the postelection stock and USD euphoria – one can only presume that market participants thought Trump was not serious about his protectionist threats.’

Current EUR, USD, GBP Interbank Exchange Rates

At the time of writing, the Euro Pound (EUR GBP) exchange rate was trending higher at 0.86, while the Euro US Dollar (EUR USD) exchange rate was slumped in the region of 1.07.