As German retail sales fell short of forecast in July this encouraged the Euro US Dollar exchange rate to extend its downtrend further.
News that sales had contracted by an unexpectedly sharp -1.2% on the month did not impress markets, indicating that domestic consumers are in a less optimistic mood than previously hoped.
Even so, as the German unemployment rate held steady at 5.7% in August, remaining at its lowest level since reunification, this limited the weakness of the single currency on Thursday morning.
After their bullish run in recent days EUR exchange rates have struggled to hold onto their momentum, even as inflationary pressure within the currency union showed fresh signs of picking up.
Analysts at Danske Bank noted:
‘Yesterday’s German and Spanish figures were both higher than expected but the upside surprise was driven mainly by energy price inflation and the higher inflation should not alter the ECB’s current view on its monetary policy strategy. We have revised our euro area headline inflation forecast slightly higher to 1.5% y/y in August but still believe core inflation will move in the opposite direction and decline to 1.1% y/y in August.’
With investors still sceptical of the prospect of the European Central Bank (ECB) adopting a more hawkish outlook in the near future this limited the upside potential of the Euro further.
If the latest raft of Eurozone manufacturing PMIs fail to point towards continued strength in the domestic economy this could keep the EUR USD exchange rate on a downtrend ahead of the weekend.
Rising US Inflation Could Increase Fed Rate Hike Bets
Both the second quarter annualised US gross domestic product and the latest ADP employment change bettered expectations on Wednesday, encouraging the US Dollar to trend higher across the board.
These latest signs of resilience from the world’s largest economy could offer encouragement to Federal Reserve policymakers, increasing the odds of another interest rate hike coming sooner rather than later.
Speculation over the prospect of a December interest rate hike from the Fed is likely to pick up this afternoon in response to July’s personal consumption expenditure figures.
Given that this is the Fed’s preferred measure of inflation a strong showing here could encourage policymakers to take a more hawkish stance and return to a policy tightening bias.
On the other hand, any downside disappointment could prompt the EUR USD exchange rate to rally sharply as any slowing in inflationary pressure could scupper the prospect of a third 2017 interest rate hike.
Current EUR USD Interbank Exchange Rates
At the time of writing, the Euro US Dollar exchange rate was on a narrow downtrend around 1.1890. Meanwhile, the US Dollar Euro exchange rate was making modest gains in the region of 0.8408.