Profit-Taking Drags EUR/USD Down from 2.5-Year High

July 27, 2017 - Written by Minesh Chaudhari

STORY LINK Profit-Taking Drags EUR/USD Down from 2.5-Year High

The Euro to US Dollar exchange rate is weakening from a two-and-a-half-year high this morning following the latest US Federal Open Market Committee (FOMC) meeting.

The EUR/USD exchange rate has weakened -0.2% to 1.1707 today.

Profit-Taking Weakens EUR Ahead of Key US Economic Data

The Euro had risen last night thanks to the weakness in the US Dollar on the dwindling odds of an interest rate hike from the Federal Reserve before 2018.

However, EUR has now sunk into negative territory against USD as markets prepare for today’s key US data this afternoon, which could once again prop up expectations of monetary tightening.

Profit-taking on the Euro’s recent high is also helping to curb fresh demand for the common currency, as speculators flood the market with the common currency by selling out of their investments to realise their gains.

Euro weakness comes despite some positive Eurozone data released this morning.

The latest German GfK consumer confidence survey has revealed a surprise rise in sentiment, with the index inching up from 10.6 to 10.8.

GfK noted;

‘Consumers are expecting that the domestic economy can even pick it up a notch over the course of the remaining year. Economic expectation continues to rise, and income expectation has surpassed its post-reunification high of last month. Consumer mood, however, suffered a few minor blows, but still remains at a high level.’

In other positive news, the Spanish unemployment rate dropped further-than-expected during the second quarter.

Joblessness was expected to fall from 18.75% to 17.8%, but instead dropped to 17.22%.

USD Rebounding From Low After Fed Comes Across More Dovish

The US Dollar initially weakened against the Euro last night, following the announcement of the latest Federal Open Market Committee monetary policy decisions.

Although the language of the subsequent press release remained in line with the standard rhetoric following a meeting, markets noticed that the word ‘recently’ had been dropped from a sentence discussing a decline in core and overall rates of inflation.

This could suggest that the FOMC are concerned this weakness in price growth is not the temporary issue it was once believed to be, which could undermine any desire amongst policymakers to tighten borrowing costs further.

Analysts seem unable to agree whether or not the Fed did exhibit more caution at this latest policy meeting, however.

BNP Paribas Research analysts commented;

‘The main message from the July FOMC statement was that the Committee is very likely to announce the starting date for running down its balance sheet at the September meeting, but it is worried about inflation and sees a softer consumer.’

‘The policy message we take from the statement is that the FOMC has become more sensitive and reactive to economic data when it comes to short rates, but the balance sheet normalization policy, being a much longer-term strategic operation, is far less so.’

But Bank of America Merrill Lynch Research stated;

‘The market interpreted the statement to be dovish, but we saw it as neutral. In our view, nothing they said today on inflation is more dovish than the recent comments from Yellen and other Fed officials.’

The futures market certainly interpreted the press release as dovish, however; odds of an interest rate hike this year have dwindled below 50%.

Will Top-Tier US Data Revive Fed Rate Hike Hopes This Afternoon?

There is no Eurozone data left on the economic calendar today, leaving the Euro vulnerable to developments in the US.

Today’s key US data could seriously shake up both the US monetary policy outlook and the EUR/USD exchange rate.

Durable goods orders figures are expected to show growth of 3.7% in June’s preliminary estimate; a significant improvement upon May’s -0.8% decline.

Out at the same time will be the advance goods trade balance figures for June.

The deficit is expected to clock in at -US$65.5 billion - an improvement of around US$1 billion.

If these figures clock in on or better-than forecasts, this will likely boost the odds of the FOMC opting to hike borrowing costs once more this year.

This will pressure the Euro lower, thanks to both the rising demand for the US Dollar and the threat of even wider policy divergence between the Federal Reserve and the European Central Bank (ECB).

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TAGS: Euro Forecasts