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EUR/USD Exchange Rate Strengthens as US Durable Goods Orders Drop

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Last week ended with the EUR USD exchange rate pushing higher on the back of robust Eurozone manufacturing and services PMI data. Today, the pairing has fluctuated, with the Euro finally coming out on top following negative US Data.

German IFO Business Confidence Up, Italian Taxpayer Forced to Bail-Out Banks

Today the German IFO Business Confidence Index figures were released for June and come in higher than forecast – implying robust business sentiment in the Eurozone’s largest economy. Despite this, however, the Euro to US Dollar (EUR/USD) exchange rate initially stumbled due to the tribulations of the Italian banking sector.

The Italian government has had to step in to wind up failing lenders (preventing a bank run) at a cost of some €17bn (£15bn). They announced that Veneto Banca and Banca Popolare di Vicenza will be bailed out by the Italian taxpayer – the second significant bailout for Italy’s banking sector in only 6 months. The appeal of the Euro understandably diminished in the wake of these events. Any Euro losses were somewhat short lived, however, in light of the negative US data today.

US Durable Goods Orders Fall 1.1% in May, USD Drops

The biggest news for today is the unexpected drop in durable goods orders for the US, which fell -1.1% in May rather than the -0.6% expected. This news demonstrates a loss of momentum for the manufacturing sector and increased anxieties that economic growth in the second quarter may not be as positive as expected. The figure immediately weighed on the US Dollar, which dropped against most of the majors (including the Euro).

Fed Official’s Attitudes Mixed – Cautious about Next Hike

The Euro/US Dollar exchange rate has also been experiencing movement as recent weeks have seen a seesawing of attitudes from US Fed officials. Last Friday, a dovish James Bullard claimed that now was the time to pause the cycle of interest rate hikes, whilst Loretta Mester took the opposing stance, claiming more hikes were needed.

Today, John Williams (San Francisco Fed President) also took a hawkish stance with claims that inflation is due to continue to rise to the US central bank’s target of 2%. Williams stated:

‘Gradually raising interest rates to bring monetary policy back to normal helps us keep the economy growing at a rate that can be sustained for a longer time. (…) If we delay too long, the economy will eventually overheat, causing inflation or some other problem.’

Ultimately the outlook is mixed, with many Fed officials sounding cautious, claiming that evidence of an increase in growth and inflation would be needed to get interest rates raised again. Fed funds futures currently price the chance of third hike this year at 40%.

With US Durable Goods Orders falling and a rate hike only chanced at 40% for this year, the US Dollar is likely to continue to struggle against the Euro.

Current EUR/USD Interbank Exchange Rates

At the time of writing, the Euro to US Dollar (EUR USD) exchange rate is trading at 1.1209. Conversely the US Dollar to Euro (USD EUR) exchange rate is trading at 0.8918.