The Euro US Dollar (EUR/USD) exchange rate put in solid gains last week after a brief drop to 1.1111 last Monday. The pair ended the week near its best 2017 level and a 9-month-high of 1.1283.
EUR USD slipped on Monday morning as Federal Reserve interest rate hike bets remained strong, but the pair could continue to advance later this week depending on the tone taken by the European Central Bank (ECB) at its upcoming meeting.
Hopes of a stronger Eurozone (both politically and economically) have only increased over the last week as the bloc’s May PMI data generally impressed, as have recent employment stats.
Updated Q1 Gross Domestic Product (GDP) results have also offered some pleasant surprises, with both Italy and Greece performing better than expected in the first quarter of 2017.
However, one set of Eurozone data over the past week was slightly concerning to traders. Germany and the Eurozone’s May Consumer Price Index (CPI) stats failed to meet expectations.
Germany’s preliminary year-on-year figures dropped from 2% to 1.5%, missing the forecast 1.6%. Meanwhile, the Eurozone’s overall inflation projection came in at 1.4%, falling from 1.9% and missing 1.5% expectations. This is partially because Easter was in April however.
While the Eurozone’s economy is still seeing solid performance and political confidence has improved since centrist Emmanuel Macron became the President of France, lower inflation weighs on market hopes that the ECB will tighten monetary policy any time soon.
As a result, investors do not expect any big changes in Thursday’s ECB meeting. This is why any surprise hawkish statements or tones from the bank’s officials or ECB President Mario Draghi would strengthen the Euro.
Any indication that the Eurozone economy is outperforming expectations or that inflation in the bloc is still solid despite May’s drop would certainly give the shared currency a boost.
Strength in the US Dollar is also likely to influence EUR USD this week of course.
After last week’s disappointing but still optimistic US Non-Farm Payroll results, investors are confident that the US economy is strong enough to support another interest rate hike from the Federal Reserve. Fed rate hike bets for June are currently over 95%.
This week’s US data is unlikely to change that much either. Unless ISM’s non-manufacturing PMI for May comes in shockingly below expectations or jobless claims are far higher than expected, these Fed rate hike bets will remain high.
Political uncertainty can of course play a part however. While scandals surrounding US President Donald Trump have not yet undermined the Fed outlook in any real way, a big development in any of these scandals could have a negative effect on market confidence.
The coming week’s Eurozone news could also affect the Euro US Dollar outlook but are likely to take a backseat to ECB news or US political news.
Eurozone retail sales for April will be published on Tuesday. An updated Eurozone Q1 growth projection will be published on Thursday. Lastly, Germany’s April trade surplus update will come in on Friday.
At the time of writing this article, the Euro US Dollar exchange rate trended in the region of 1.1262. The US Dollar to Euro exchange rate traded at around 0.8875.
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