Bullish Eurozone Service PMIs Fail to Drive Euro US Dollar (EUR/USD) Exchange Rate Rebound
A solid raft of finalised Eurozone services PMIs helped to shore up the Euro to US Dollar (EUR/USD) exchange rate at the start of the week, in spite of rising Federal Reserve interest rate hike bets.
Service sector growth across the currency union remained strong in January, with both the German and Italian PMIs clocking multi-year highs.
This naturally improved confidence in the economic outlook, potentially putting further pressure on European Central Bank (ECB) policymakers to take a more hawkish stance in the months ahead.
Even so, the Euro (EUR) struggled to make a particularly strong rally, with German coalition talks continuing past Sunday’s self-imposed deadline.
While both Angela Merkel’s CDU/CSU and the SPD sounded a relatively optimistic note in spite of this delay, however, investors remain somewhat sceptical over the political outlook of the Eurozone’s powerhouse economy.
Until a final coalition agreement is reached EUR exchange rates are likely to remain biased to the downside to at least some degree.
US Dollar (USD) Supported by Higher Wage Growth and Fed Rate Hike Bets
Confidence in the US Dollar (USD) has generally improved in the wake of Friday’s non-farm payrolls report, to the detriment of the EUR/USD exchange rate.
As average hourly earnings unexpectedly accelerated 2.9% on the year in January this encouraged investors to bet on the prospect of a more aggressive pace of Fed monetary tightening this year.
However, as analysts at TDS noted:
‘The upside realized in wages will not go overlooked by the Fed. While some idiosyncratic factors (such as minimum wages) may have contributed to the strength, the y/y pace is robust and we expect additional improvement on the back of a tight labour market. Further acceleration this year risks a rethink in the pace of Fed rate hikes, but more evidence will be needed. Our base case remains at three rate hikes this year.’
Unless US data continues to surprise positively USD exchange rates may struggle to gain particular traction, given the sense of uncertainty still associated with the Trump administration’s tax cuts and approach to trade.
Even so, if Fed policymakers take a hawkish tone in the coming days the EUR/USD exchange rate looks vulnerable to further losses.
ECB Policy Commentary Forecast to Prompt Further EUR/USD Exchange Rate Volatility
Commentary from ECB President Mario Draghi could also have a negative impact on the EUR/USD exchange rate, with any signs of dovishness set to discourage markets.
Should Draghi talk down the prospect of the ECB’s long-running quantitative easing program being wound down sooner rather than later the Euro could slump sharply.
Similar focus will fall on Thursday’s publication of the ECB Economic Bulletin, as well as comments from various other ECB policymakers.
However, the strength of the latest raft of German economic data could help to limit the downside potential of EUR exchange rates in the near term.
Signs of continued strength within fresh German factory orders, industrial production and trade figures may offer the Euro a fresh boost, even if the domestic inflationary outlook remains muted.
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