As the German producer price index came in below forecasts in November this knocked some of the wind out of the sails of Euro exchange rates.
While investors had anticipated a slight loss of momentum in the measure there was still disappointment as the monthly index slipped from 0.3% to 0.1%.
This suggests that inflationary pressure within the Eurozone’s powerhouse economy is not building as markets would like, increasing doubts over the prospect of the European Central Bank (ECB) returning to a tightening bias in the near future.
With the ECB looking set to leave monetary policy on hold for some time to come the upside potential of the Euro remains limited, particularly as the Eurozone current account surplus also narrowed.
Even so, the Euro US Dollar exchange rate was able to hold onto a narrow uptrend on Wednesday morning thanks to the relative softness of the ‘Greenback’.
A rallying point could be in store for EUR exchange rates ahead of the weekend if the latest Eurozone and German GfK consumer confidence indexes show an improvement on the month.
Signs that the mood amongst Eurozone consumers is holding up may encourage investors to favour the Euro, even though domestic inflationary prospects still look distinctly muted at this juncture.
As analysts at Rabobank noted:
‘The only conclusion one could draw from recent numbers is that underlying inflation pressures remain extremely subdued, even more so than one would expect.’
Passage of Tax Reform Bill Fails to Shore Up USD
While the Trump administration’s tax reform bill cleared a major hurdle overnight this failed to energise the US Dollar.
Due to the long-running market anticipation of the reforms the ultimate impact appears rather muted, with the measures already largely priced in to USD exchange rates.
There are still some concerns over the long-term ramifications of the bill, with confidence in the underlying health of the US economy somewhat limited.
However, the appeal of the US Dollar could strengthen once again if the latest existing home sales figures point towards greater resilience within the domestic housing market.
Focus will also fall on November’s leading index on Thursday, with the measure forecast to have slumped from 1.2% to 0.4%.
Any fresh signs of vulnerability within the US economy could offer the EUR USD exchange rate support, undermining the prospect of the Federal Reserve pursuing a more aggressive pace of monetary tightening in the coming year.
Current EUR USD Interbank Exchange Rates
At the time of writing, the Euro US Dollar exchange rate was trending narrowly in the region of 1.1840. Meanwhile, the US Dollar Euro exchange rate was slumped around 0.8443.