The Euro US Dollar exchange rate inched ahead today as markets responded to yesterday’s European Central Bank (ECB) minutes, some positive German business confidence readings this morning and concerns regarding inflation at the US Federal Reserve.
EUR Exchange Rates Propelled by ECB Minutes and German Business Confidence
The Euro climbed to a six-week high against the US Dollar on Friday, with investors increasingly optimistic about the strength of the Eurozone’s economy after a raft of positive data this week.
Thursday’s minutes from the latest ECB policy meeting have prolonged this lead, revealing that policymakers broadly agree on the extension of the bank’s quantitative easing (QE) scheme, (albeit slightly downgraded).
There was, however, some debate over the decision to keep asset purchases open-ended.
MUFG Currency Analyst Lee Hardman shared this sentiment:
‘Without the ECB’s recent commitment to maintain QE purchases until the end of September of next year, the Euro would likely be trading at even strong levels at the current juncture. While there is still a risk that ongoing political developments could potentially trigger another knee jerk Euro sell off in the coming weeks or months, any bouts of Euro weakness should remain both temporary and limited’.
In other news, today’s German Institute for Economic Research (IFO) surveys proved mostly positive, with the business climate reading printing at 117.5, up from the forecast of 116.5 and the previous of 116.7 (reaching a new high in November).
The IFO ‘expectations’ reading also inched ahead; up from 109.1 to 111.0, beating the forecast of 1.8.8.
Despite this, some firms were slightly less optimistic about current trading conditions than a month ago, with the current assessment contracting from 125 to 124.4.
Ultimately, Germany’s business optimism remains on solid form, despite the on-going political instability caused by the failure of coalition talks.
Fed Inflation Caution Limits USD Exchange Rate Upward Potential
Market attention today will soon shift to the US November Markit PMI readings, with manufacturing expected to rise from 54.6 to 55 and services expected to move at a snail’s pace from 55.3 to 55.4 in November.
If these figures prove encouraging then the ‘Greenback’ may find the purchase it needs, though its upward potential may remain limited in light of Fed concerns regarding inflation.
Federal Reserve Officials stated at their latest meeting that they would indeed raise interest rates ‘in the near-term’ on the back of a strengthening economy, though some insisted that their support would hinge on whether inflation noticeably picks up.
There are now three weeks to go before the Fed’s final policy meeting of 2017, a meeting that markets have historically expected to involve a third and final rate hike for the year.
The minutes have diminished some of this expectation, however, with economists now worried that America’s limp inflation figure will delay things into 2018.
This outlook continues to weigh on the US Dollar.
EUR USD Exchange Rates & the Week Ahead
Next week will feature a variety of important releases for both the Euro and the US Dollar, with German retail sales, the OECD economic outlook, the German GfK consumer confidence reading, German and Eurozone inflation figures, and German employment figures being the most pertinent.
For the United States, markets will be watching the advance goods trade balance, house price index, US consumer confidence index, US GDP, jobless claims, and various Markit PMI readings.
Beyond this, the ultimate outlook for the Euro US Dollar may not be decided by data, but by political news, with Germany’s coalition failure liable to continue weighing on the Euro unless some form of government is successfully formed and the US tax reform liable to cause volatility if it stagnates, fails, or successfully progresses.