US Tariff Announcement Fails to Weigh Down Euro US Dollar Exchange Rate
As Federal Reserve Chair Jerome Powell took a slightly more dovish tone on the subject of wage growth this encouraged the Euro to US Dollar (EUR/USD) exchange rate to surge higher ahead of the weekend.
Powell’s more measured comments on wages took some of the heat out of the US Dollar (USD), creating some doubt over the prospect of the central bank raising interest rates four times over the course of 2018.
While USD exchange rates found some support on the back of the Trump administration’s announcement of heavy tariffs for steel and aluminium this failed to keep the US Dollar on a stronger footing for long.
There are concerns that the move could have significant negative repercussions for the US economy, as well as global growth, given the rather small size of the domestic steel industry.
European Central Bank Forecast to Maintain Dovish Policy Outlook
Although Germany retail sales failed to rebound as far as forecast in January this still offered support to the EUR/USD exchange rate on Friday morning.
Signs continue to point towards rather resilient economic growth within the currency union, something which limits the downside potential of the Euro (EUR).
Even so, this is unlikely to be enough to alter the current policy outlook of the European Central Bank (ECB), which looks set to maintain a generally dovish tone for some time to come.
There is still the potential for policymakers to make some slight shift towards hawkishness, though, at Thursday’s policy meeting.
As Tim Riddell, research analyst at Westpac, noted:
‘Next week’s German labour cost data will be key ahead of both ECB and German pay discussions, but underemployment is still capping wages. The lack of any uptrend in Feb CPI reduces pressure on ECB to alter guidance, though markets expect downside risks to be reduced or dropped on 8th Mar.’
If the ECB does adopt a slightly more optimistic message at this juncture the EUR/USD exchange rate could see further gains, even though the prospect of any monetary tightening remains distant.
Strong US Jobs Data Forecast to Dent EUR/USD Exchange Rate
Commentary from various Fed policymakers will be in focus over the coming days, with markets still trying to gauge the likelihood of a more aggressive pace of monetary tightening.
If speakers echo the more dovish nature of Powell’s comment on wages, however, the mood towards the US Dollar could sour significantly.
Friday’s non-farm payrolls report may weigh on the EUR/USD exchange rate if the US labour market continues to show signs of tightening.
The key focus will be on the latest wage growth figures, though, which may add support to bets that the Fed will take a more measured approach in the coming months.
Worries over a potential global trade war are also likely to put something of a dampener on USD exchange rates unless the Trump administration is willing to row back on the plan.