Update, 08.50, 25/10: The Euro US Dollar exchange rate has remained at opening levels so far this morning as markets await the latest German business sentiment data from Ifo. The private sector outlook on the current and future business climate is expected to edge marginally lower, although likely not by enough to cause markets concern.
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Positive data from the Eurozone hasn’t been enough to push the Euro higher against the US Dollar this morning, with the latter supported by high bets of a December interest rate hike from the Federal Reserve.
The EUR USD exchange rate is trending around 1.1757, resisting the ‘Greenback’ strength thanks to solid employment growth from the Eurozone’s private sector.
Decade-High for Eurozone Jobs Growth Supports EUR as Data Supports Case for QE Taper
A strong run of Eurozone PMIs has pushed the Euro higher this morning, after suggesting that the currency bloc economy continues to firm.
Although the overall services and composite indices edged lower than economists had expected, overall the results for France, Germany and the Eurozone as a whole remained on strong form.
IHS Markit Associate Director Andrew Harker explained; ‘The Eurozone economy has had a good year so far, and the initial signs are that this has continued at the start of the final quarter of 2017. The PMI signalled a further strong increase in output across the private sector in October.’
Markets were particularly cheered by the news that employment growth was at the highest in a decade.
The Phillips Curve suggests that as unemployment falls inflation rises, so strong hiring activity bodes well for price growth in the currency bloc and therefore increases the odds of a move towards normalising monetary policy by the European Central Bank (ECB).
Harker agrees that the data supports a positive outlook on monetary policy, stating;
‘Later this week, the ECB looks set to announce a scaling back of bond purchases for 2018, a move that would appear to be justified based on this latest set of PMI data.’
US Dollar Resists Euro Appreciation Thanks to Sky-High December Rate Hike Bets
Odds on the Fed Funds futures market of an interest rate hike from the Federal Reserve in December have climbed to 96.1% today, supporting the US Dollar in the face of a strengthening Euro.
Markets are also quietly optimistic ahead of the nomination of the next person to be Chair of the Federal Reserve when Janet Yellen’s term ends in February.
Trump announced that he is very close to revealing his pick, with Yellen still supposedly in the running for a second term, despite numerous attacks from Trump during his election campaign.
Yellen is the most dovish of all the candidates up for the job. This, combined with the fact that four more hawkish governors will join the Federal Open Market Committee (FOMC) replacing four dovish members, suggests that the outlook for interest rates going forward is more upbeat than it was a few months ago.
It seems that Trump is leaning towards Jerome Powell, a current Fed president who would be well-received by markets thanks to his similar views to Yellen, meaning the status quo would largely remain in place, albeit with a slightly more confident outlook.
EUR USD Exchange Rates Forecast to Ignore German Ifo Results as ECB Meeting Looms
Tomorrow’s German Ifo sentiment surveys will give a greater picture of confidence within the private sector of the Eurozone’s largest economy.
The business climate, expectations and current assessment scores are all expected to edge lower by -0.1 point, but this is unlikely to cause much disturbance for the Euro, partly because the indices will all remain firmly in positive territory.
Also, as the European Central Bank’s eagerly-awaited monetary policy meeting will conclude with announcements of any decisions made on Thursday, markets are likely to mostly overlook tomorrow’s sentiment data.
This may leave the EUR USD exchange rate vulnerable to advances from the US Dollar; especially if the day’s headline US data proves better-than-expected.
Preliminary US durable goods orders figures for September are expected to show that growth slowed from 2% to 1%, while the decline in new home sales is expected to slow dramatically from -3.4% to -0.9%.
The day’s figures would have to perform significantly worse-than-forecast to weaken the US Dollar, given that the odds of an interest rate hike from the Federal Reserve in December are now up to 96.7%, according to the Fed Funds futures market.