Even as worries over the outlook of the Eurozone continue to mount the Euro to US Dollar exchange rate has trended narrowly, in part thanks to market uncertainty over the prospect of an imminent Fed rate hike.
- German ZEW Economic Sentiment Survey dipped in September – Confidence in Eurozone’s powerhouse economy deteriorated
- US Dollar boosted by ongoing speculation over Fed policy outlook – Odds on 2016 rate hike remained higher
- Eurozone industrial production forecast to have contracted in July – Euro expected to trend lower in response to weaker data
- Stronger US CPI could boost odds of Fed action further – EUR USD exchange rate volatility expected in response to inflation results
Signs of strength within the US economy could prompt the EUR USD exchange rate to weaken, with bullish data likely to encourage further bets on a 2016 interest rate rise.
Weaker German Sentiment and Fed Hike Bets Weighed on EUR USD Exchange Rate
Despite concerns rising once again over the outlook of the Greek bailout deal and the country’s progress on reforms the Euro (EUR) has not been faring too badly against rivals in the early week. Investors remained encouraged by the European Central Bank’s (ECB) apparent dismissal of further monetary loosening for the near future, despite the fact that domestic inflationary pressure remains persistently soft.
Confidence in the single currency was somewhat dented on Tuesday, however, after the German ZEW Economic Sentiment Survey proved discouraging. While sentiment failed to increase as forecast the current assessment of economists dipped further than anticipated, weakening from 57.6 to 55.1 in September. This did not offer much encouragement in the outlook of the Eurozone’s powerhouse economy, particularly given the slowness of other recent data.
The Euro to US Dollar (EUR USD) exchange rate was also weighed down by continued market speculation over the odds of an imminent Federal Reserve interest rate hike. While policymakers did not offer a particularly hawkish view on monetary policy this did not discourage bets on a 2016 rate move for long. As a result, with risk appetite generally limited, the US Dollar (USD) was able to make strong gains across the board.
Euro (EUR) Trended Lower in Anticipation of Eurozone Industrial Production Figures
An unexpected weakening in the NFIB Small Business Optimism Index weighed on the ‘Greenback’ overnight, offering fresh evidence of slowness within the world’s largest economy. This served as a reminder that economic activity is not as robust as the Federal Open Market Committee (FOMC) might like, prompting some modest selling of the US Dollar. Even so, as researchers at BBH noted:
‘Maybe the suggestion that a 25 bp hike in the target range somehow would make the Federal Reserve imprudent, incautious or impatient is a bit much.’
Ahead of July’s Eurozone Industrial Production figures the EUR USD exchange rate trended narrowly, with expectations of more disappointing results. Forecasts are for production to have slumped from 0.4% to -0.8% on the year, reaffirming the fragile nature of the Eurozone’s industrial sector. An upside surprise could offer the single currency another rallying point, though, if the currency union is shown to have shrugged off the increased uncertainty that followed the UK’s vote to leave the EU.
EUR USD Exchange Rate Forecast: Eurozone and US Inflation Data in Focus
Thursday’s Eurozone Consumer Price Index results are not expected to have a particularly marked impact on the common currency, with no change predicted from the earlier preliminary figures. Even so, the Euro could find support if the Eurozone’s July trade surplus is found to have widened. Any signs of resilience from the currency union are likely to encourage investors, lowering the chances of the ECB returning to a dovish bias.
Demand for the US Dollar is expected to soften over coming days, though, as markets await August’s US CPI report. Although this is not the Fed’s preferred measure of inflationary pressure an uptick could nevertheless see the pricing of an imminent rate hike rise sharply. Expectations are for inflationary pressure to have strengthened from 0.8% to 1.0% on the year, something which could ease concerns surrounding the outlook of the domestic economy somewhat. Any disappointment, on the other hand, would likely give the EUR USD exchange rate a strong boost going into the weekend.
Current EUR, USD Exchange Rates
At the time of writing, the Euro to US Dollar (EUR USD) exchange rate was trending narrowly at 1.1224, while the US Dollar to Euro (USD EUR) pairing was trending lower in the region of 0.8907.