Euro to US Dollar (EUR/USD) Exchange Rate Benefits From Underwhelming US Productivity
A surprise contraction in US non-farm productivity in the fourth quarter encouraged the Euro to US Dollar (EUR/USD) exchange rate to remain on an uptrend.
Investors were disappointed to find that US productivity had fallen at the end of 2017, raising concerns that the underlying health of the world’s largest economy is not as strong as hoped.
This weaker showing reversed some of the boost the US Dollar (USD) saw in the wake of last night’s Federal Open Market Committee (FOMC) policy decision.
Even so, the more hawkish tone taken by policymakers suggests that an imminent interest rate hike is very much on the cards, limiting the downside potential of USD exchange rates.
As strategists at Brown Brothers Harriman noted:
‘There is little doubt the Fed will raise rates in March. That will be Powell’s first meeting as chair. A rate hike at his first meeting makes for good optics in terms of the central bank’s credibility. The members’ economic forecasts will be updated and the risk is on the upside. The rate hike may be backed up by a change in the risk assessment.’
Euro (EUR) Buoyant After Eurozone Manufacturing Sector Demonstrates Solid Growth
The finalised raft of Eurozone manufacturing PMIs for January also offered support to the EUR/USD exchange rate on Thursday.
While there was little overall change from the provisional figures the data still solidified the generally positive image of the currency union’s economic outlook.
Greece and Italy posted particularly strong growth on the month, indicating that the improvement is not just confined to more robust members such as Germany.
This bullish growth is likely to give the European Central Bank (ECB) greater cause for confidence going forward, potentially boosting the odds of the quantitative easing program being wound down sooner rather than later.
If Friday’s Eurozone producer price index figures show an uptick this may boost the Euro (EUR) further still, with a higher reading boding well for domestic inflationary prospects.
On the other hand, any disappointment is likely to knock the EUR/USD exchange rate onto the back foot once again.
EUR/USD Exchange Rate Weakness Forecast Ahead of US Jobs Data
Further volatility is expected for the EUR/USD exchange rate ahead of tomorrow’s US non-farm payrolls report, which is forecast to show further tightening of the domestic labour market.
An acceleration in average hourly earnings on the year could also bolster the US Dollar, giving the Fed further incentive to consider a faster pace of monetary tightening.
However, if the labour market fails to shed further slack USD exchange rates are likely to remain under a degree of pressure.
While even a sharp downside surprise may not be enough to dent the prospect of an imminent Fed rate hike this could still buoy the EUR/USD exchange rate ahead of the weekend.