Unsurprisingly Dovish ECB Bulletin Fails to Shore up EUR USD Exchange Rate

August 3, 2017 - Written by David Woodsmith

STORY LINK Unsurprisingly Dovish ECB Bulletin Fails to Shore up EUR USD Exchange Rate

A mixed raft of Eurozone services and composite PMIs left the Euro US Dollar exchange rate on a softer footing, even though the currency union remained in a solid state of growth.

Investors were discouraged by downward revisions to the finalised German PMIs, prompting concerns that the Eurozone’s powerhouse economy is losing some of its momentum at the start of the third quarter.

As Chris Williamson, Chief Business Economist at IHS Markit, noted:

‘Of the four largest euro members, only Italy recorded faster growth in July, pushing the PMI into territory consistent with 0.5% quarterly GDP growth. Spain nevertheless continued to record the strongest overall expansion, with the PMI indicative of 0.9% growth.

‘The slowdown in Germany meant it registered the weakest increase in activity of the four largest euro countries for the first time in over 12 years, though the ten-month low PMI reading still points to a 0.4- 0.5% GDP growth rate.’

The Euro failed to find any particular support on the back of the European Central Bank’s (ECB) latest Economic Bulletin, which further undermined speculation that policymakers could adopt a more hawkish outlook in the near future.

With interest rates likely to remain at their current lows for some time to come and any imminent tapering of the quantitative easing program looking to be a somewhat questionable prospect the appeal of the single currency remains muted.

US Dollar Trends Higher Ahead of Non-Farm Payrolls Report

In spite of a disappointing ADP employment change report the mood towards the US Dollar picked up on Thursday morning.

While there were some concerns that the weaker-than-expected ADP report could bode ill for Friday’s more critical non-farm payrolls data the correlation between the two is far from reliable.

This limited the downside potential of the ‘Greenback’, especially as the sense of political turmoil engulfing the Trump White House was seen to ease a little overnight.

Marc Chandler, Global Head of Currency Strategy at BBH, commented:

‘The main challenge with the US labour market is not job creation. Although the pace of jobs growth has slowed, it remains sufficiently strong to absorb more slack in the labour market. In 2016, the US created an average of 187k net new jobs a month. In H1 17, it created 180k a month. The problem for many American households and the Federal Reserve is that wage growth remains meagre.’

Given the recent bearishness of the US Dollar anything short of a significant downside surprise in the headline employment change figure is unlikely to particularly benefit the EUR USD exchange rate.

Greater focus could fall on the latest wage growth data, with growth in average weekly earnings forecast to have dipped from 2.5% to 2.4% on the year in July.

Any softening in wages could diminish the odds of the Federal Reserve achieving a third interest rate hike before the end of the year, limiting the appeal of the ‘Greenback’.

As Chandler continued:

‘From the Fed's point of view, headline inflation converges to core inflation, and core inflation converges to wage growth. The weak wage growth is an obstacle to the achievement of the Fed's inflation target.’

On the other hand, if wages are found to have strengthened in the last month this could extend the losses of the EUR USD exchange rate ahead of the weekend.

Weak German Data Could Extend Euro Losses

The mood towards the Euro could sour further on Friday, meanwhile, if the latest raft of German data fails to signal greater resilience within the domestic economy.

If the German factory orders, Construction PMI or Retail PMI figures add to evidence that the Eurozone’s powerhouse economy is starting to falter this could weigh heavily on EUR exchange rates.

Forecasts point towards a solid uptick in factory orders on the year, however, which could encourage investors to buy back into the single currency.

Any improvement in the various Eurozone retail PMIs may equally help to shore up the EUR USD exchange rate in the short term, even if any positive showings are unlikely to boost the prospect of a more hawkish ECB outlook.

Like this piece? Please share with your friends and colleagues:

International Money Transfer? Ask our resident FX expert a money transfer question or try John's new, free, no-obligation personal service! ,where he helps every step of the way, ensuring you get the best exchange rates on your currency requirements.

TAGS: Euro Forecasts