- Hawkish Fed minutes shored up US Dollar – June rate hike back on table
- ECB in ‘wait and see’ mode – Reduced likelihood of further easing boosted Euro demand
- Weaker German sentiment forecast to dent Euro – ZEW, IFO, GfK surveys in focus
- EUR/USD exchange rate may strengthen on US Manufacturing PMI – Weaker growth would dent chances of imminent Fed action
FOMC, ECB Commentary Drove EUR/USD Exchange Rate Movement
Investors piled back into the US Dollar (USD) on Thursday after the minutes of the Federal Open Market Committee’s (FOMC) April meeting, which proved surprisingly hawkish. This reinforced more recent comments from Fed policymakers, prompting markets to rapidly adjust their pricing for the possibility of a June interest rate hike. As a result the Euro to US Dollar (EUR/USD) exchange rate dipped to an eight-week low of 1.1182, dented by concerns that greater policy divergence was more likely between the Fed and the European Central Bank (ECB).
However, the appeal of the single currency (EUR) picked up in response to the account of the ECB’s latest policy meeting. Policymakers were found to have been less inclined towards the idea of further monetary loosening than investors had feared, sharply reducing the likelihood of the central bank opting to ease again imminently. The general attitude appeared to favour a ‘wait and see’ approach, given that the raft of measures announced in March have yet to filter through and their ultimate impact remains unclear.
Weaker Eurozone PMIs Could Prompt Euro (EUR) Softness
In the coming week the Euro is expected to see movement on the back of the latest raft of Eurozone PMIs. If economic conditions within the currency union are shown to have weakened in May this could prompt investors to move away from the common currency. Significant softness is likely to eclipse the impact of recent ECB commentary, as markets remain inclined to increasingly dismiss the extent of central banks’ influence.
The German ZEW Economic Sentiment survey will also be of note to investors, as the outlook of the Eurozone’s powerhouse economy remains key to general Euro confidence. Further assessment of the German economy will be offered by the IFO Business Sentiment and GfK Consumer Confidence surveys, with any weaker showings likely to undermine the appeal of the Euro.
US Dollar (USD) Forecast: Shifting Odds of June Fed Hike to Provoke Volatility
Market pricing with regards to the timing of the Fed’s next interest rate hike is expected to be the major influence on the US Dollar (USD) ahead of the June policy meeting. General opinion still seems to remain that the Fed will not opt to raise interest rates so soon, in part due to volatility surrounding the UK’s EU membership referendum. As Lee Hardman, currency analyst at MUFG, noted:
‘On balance, we still believe that the fed will err on the side of caution and wait until after the result of the referendum favouring a rate hike in July but we are certainly less confident in our view now.’
Given that members of the FOMC have stressed the data-dependence of any future move on monetary policy the odds of a June hike are likely to shift in response to the week’s key data releases. Consequently any downside surprises on the US Manufacturing PMI, Durable Goods Orders and first quarter GDP figures could prompt the ‘Greenback’ to weaken, to the benefit of the EUR/USD exchange rate.