Deteriorating German Business Sentiment Weighs on Euro to US Dollar (EUR/USD) Exchange Rate
February’s German IFO business sentiment survey showed a fresh deterioration in domestic confidence, leaving the Euro to US Dollar (EUR/USD) exchange rate on a weak footing.
As the headline index slipped from 99.3 to 98.5 on the month the appeal of the Euro (EUR) naturally soured, with investors remaining wary of the prospect of a further slowdown in German growth.
Coupled with confirmation that the German economy stagnated in the fourth quarter this left EUR exchange rates exposed to fresh selling pressure.
With the Eurozone’s powerhouse economy struggling to shake off the impact of the vehicle emissions scandal and slowing global trade the growth outlook remains muted.
As both the current assessment and expectations measures saw a decline in the IFO survey investors saw little cause for confidence in the single currency on Friday morning.
US Dollar (USD) Losses Possible on Dovish Federal Reserve Commentary
However, the EUR/USD exchange rate could recover some ground if the latest commentary from Federal Reserve policymakers leans towards greater caution.
Signs that the Fed may leave interest rates on hold for longer, possibly for the remainder of 2019, could see the US Dollar (USD) slump sharply across the board.
In the wake of January’s Federal Open Market Committee (FOMC) meeting minutes the odds of tighter monetary policy appear to have diminished.
If Fed policymakers indicate a reluctance to return to a monetary tightening cycle, barring an improvement in US data, this could weigh heavily on USD exchange rates.
On the other hand, hawkish commentary may give the US Dollar a leg up, with markets likely to take encouragement from evidence that some policymakers still see the case for a 2019 interest rate hike.
Unless US-China trade discussions continue to progress, though, this may limit the appeal of the US Dollar.
Weaker German Inflation Forecast to Limit Euro (EUR) Appetite
The mood towards the Euro may sour further next week, meanwhile, if February’s German consumer price index fails to pick up as forecast.
After a sustained weakening of domestic inflationary pressure investors are hoping to see signs that price pressures are mounting once again within the Eurozone’s powerhouse economy.
While investors expect inflation to remain below the European Central Bank’s (ECB) 2% target any improvement could encourage hopes that the central bank will shift towards a less dovish outlook.
Another monthly contraction in inflation, though, would leave the single currency exposed to a fresh bout of selling pressure.
As long as signs continue to point towards the Eurozone economy losing momentum in the first quarter, however, the EUR/USD exchange rate may struggle to gain traction.
Without evidence of an improving growth outlook the case for ECB monetary tightening looks set to diminish further, to the detriment of the Euro.