Euro (EUR) Down as PMIs Disappoint
The Euro is soft today thanks to the results of Markit PMIs, most of which have registered either a slower-than-expected rise in sector growth or an unexpected fall. Markit Manufacturing and Composite PMIs for France and Germany have all printed below forecast or the previous month’s reading, although the French services sector contraction ended and the industry saw a better-than-expected rate of growth.
The Eurozone PMIs have shown a similar performance, with all indexes falling further-than-anticipated. Also released was the ECB Survey of Professional Forecasters, which shows a downwardly revised inflation estimate for 2016 of 0.7%.
Euro (EUR) Falls as Draghi Hints at More Stimulus
While the European Central Bank (ECB) left interest rates and quantitative easing on hold today, President Mario Draghi has highlighted a potential need for additional stimulus. Comments made by Draghi have all-but confirmed forecasts that policy would be adjusted in the first quarter: ‘It is necessary to review and reconsider our monetary policy stance in early March, when new economic projections become available.’
When asked whether the ECB could extend the current stock of assets purchased under the current quantitative easing scheme to include others such as equities, or lower interest rates other than the deposit rate, Draghi reiterated that there are no limits to monetary policy.
Widespread market belief that the European Central Bank (ECB) won’t make changes to their monetary policy during today’s meeting has strengthened the Euro. An upcoming speech by Mario Draghi, famed for his dovish rhetoric, threatens to have the opposite effect. Meanwhile, the US Dollar is soft, perhaps as investors re-evaluate the likelihood of a strong divergence between Fed and ECB monetary policy.
Euro to US Dollar (EUR/USD) Exchange Rate Trending Up: Markets Predict no Action from ECB
The threat of additional monetary stimulus in the coming months hangs over many central banks, but the markets believe that the ECB won’t act today. That has allowed the Euro to extend strong leads on almost all of its major trading partners as there is little threat the common currency will be weakened by additional stimulus measures. A loosening of monetary policy is on the horizon, however, according to economists polled by Bloomberg. Of those who believe changes are on the way during 2016, 45% of respondents believe that the ECB will decide to ease further at the March 10th meeting, while 35% believe the next policy changes will come on June 2nd.
Nearly two-thirds (60%) of the economists polled predict that 2016 will see some form of easing this year, leaping up from 40% a few weeks ago. 57% are anticipating an expansion of the current rate of asset purchasing, taking quantitative easing up from €60 billion ($66 billion). Just over half also predict that the deposit rate, currently at -0.3%, will be cut further into the negative.
The Euro to US Dollar (EUR/USD) exchange rate is currently trading around 1.0901.
US Dollar to Euro (USD/EUR) Exchange Rate: Gold Strong on Fears Over US Economy
Trader risk aversion was clearly demonstrable yesterday after spot rates on gold (the current selling price) rose to $1103.80 per ounce. Because gold is priced in US Dollars, a rise in gold prices shows a fall in the ‘Buck’, while gold’s status as a safe-haven asset helps provide a gauge of investor confidence. A rally to gold shows that traders are concerned over the state of the global economy; government bonds have also seen a similar performance. However, US gold futures for delivery in February dropped -0.2% to £1104.
The prospect of more interest rate hikes from the Federal Reserve is threatening to push gold below the $1,000 mark as the US Dollar strengthened. BMI Research, one arm of ratings agency Fitch, has forecast that bullion could fall to $950, although they have now noted that the Fed may not be able to deliver the planned interest rate hikes.
According to a report by BMI Research, ‘we see growing risk of disappointing US economic growth. Should the Fed be forced to pause or even backtrack on rate hikes, $1,200/oz would look a likely upside target for gold in 2016.’
The US Dollar to Euro (USD/EUR) exchange rate is currently trading between 0.9154 and 0.9198.
Euro to US Dollar (EUR/USD) Exchange Rate Forecast: Draghi Speech Could Topple Euro
If the ECB makes no changes to monetary policy EUR/USD could hold its strong position today. However, if recent history is anything to go by, an upcoming speech by ECB President Mario Draghi could topple the common currency. Draghi’s previous speeches have been highly dovish and it is unlikely that he has discovered his hawkish streak during the last couple of weeks considering the worsening global conditions.
The Euro to US Dollar (EUR/USD) exchange rate is currently trending between 1.0866 and 1.0921.