Federal Reserve Anticipation Keeps Euro to US Dollar Exchange Rate Movement Limited
While this week’s Eurozone data has been generally optimistic so far, the Euro to US Dollar (EUR/USD) exchange rate still fell from Tuesday’s best levels and trended within a relatively tight region on Wednesday ahead of the Federal Reserve’s August policy decision.
EUR/USD is currently on track to regain some of last week’s losses. EUR/USD opened this week at the level of 1.1655 and briefly climbed to touch on a weekly high of 1.1742 on Tuesday, before sliding again.
At the time of writing on Wednesday, EUR/USD was trending in the region of 1.1685 as investors anticipated the Federal Reserve’s key August policy decision.
The day’s final July Eurozone manufacturing PMI data did little to shift Euro (EUR) sentiment, as the overall Eurozone print met forecasts. The Euro’s strength was also limited by market reaction to Tuesday’s underwhelming Eurozone growth projections.
Euro (EUR) Exchange Rates Buoyed by Inflation, Weakened by Growth
While the Euro has been able to advance against the US Dollar (USD) this week so far, it has been unable to hold its best levels and continue to climb due to some underwhelming Eurozone ecostats.
Tuesday saw the publication of the Eurozone’s Q2 Gross Domestic Product (GDP) projections, which fell short of forecasts in both major prints. The quarterly print unexpectedly slowed from 0.4% to 0.3%, while the yearly figure slowed from 2.5% to 2.1% rather than the forecast 2.2%.
Wednesday’s session followed with the publication of Markit’s final July manufacturing figures, which beat projections in France but fell short in Germany, and ultimately met projections in the Eurozone coming in at 55.1.
According to Chris Williamson, Markit’s Chief Business Economist:
‘Worse may be to come. Even this reduced rate of output growth continued to outpace order book growth, resulting in the smallest rise in order book backlogs for two years. The clear implication is that manufacturers may have to adjust production down in coming months unless demand revives.’
The Euro was still higher against the US Dollar this week overall though, as Tuesday’s Eurozone inflation projections beat forecasts.
US Dollar (USD) Exchange Rates Limited Ahead of Federal Reserve Decision
Recent US data has done little to influence the direction of US Dollar movement, as it has been generally unsurprising or has not been influential enough to knock the market’s generally bullish expectations for the US economic outlook.
However, the Federal Reserve could influence the US Dollar outlook during its August policy decision on Wednesday evening, at least if the bank takes a surprising tone on the US economic outlook.
The Fed is not expected to hike US interest rates during this week’s decision, but investors are hesitant to move much on the US Dollar until the bank gives more clarity on its signals for the policy outlook.
US Dollar investors are also anticipating key US PMI data from ISM, as well as July’s US Non-Farm Payroll report due at the end of the week.
As a result of this anticipation, Tuesday’s news that US Personal Consumption Expenditure (PCE) price data had largely met forecasts did little to shift the US Dollar’s demand.
Euro to US Dollar (EUR/USD) Forecast: Federal Reserve and Friday Data in Focus
The tone the Federal Reserve takes in its August monetary policy decision on Wednesday evening is likely to set the tone for US Dollar movement for the remainder of the week, so Euro to US Dollar (EUR/USD) investors are highly anticipating it.
The bank is expected to leave US monetary policy frozen, but if it hints that two more 2018 rate hikes are on the way or plays down the potential impact of US trade protectionism on the US economy then the US Dollar is likely to strengthen.
On the other hand, an unexpectedly cautious tone regarding the strength of the US economy would likely leave the US Dollar weaker and EUR/USD would continue to climb.
Of course, developments regarding US trade protectionism could influence the US Dollar too due to its appeal as a ‘safe haven’ investment.
In terms of data, Thursday’s session will be a little quieter but slews of key Eurozone and US data will be published on Friday.
The Eurozone’s final July services and composite PMI will be published, as well as the Eurozone’s June retail sales results.
Friday’s US trade balance, ISM non-manufacturing PMI and July US Non-Farm Payroll report also have the potential to be highly influential for the Euro to US Dollar (EUR/USD) exchange rate.