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Euro US Dollar (EUR/USD) Exchange Rate Slumps as Eurozone Manufacturing Slows to Thirty-Five-Month Low

January 2, 2019 - Written by Frank Davies

Euro US Dollar (EUR/USD) Exchange Rate Trends Lower as Eurozone Manufacturing Sector Hits Thirty-Five-Month Low

As December’s finalised raft of Eurozone manufacturing PMIs confirmed a continued loss of economic momentum the Euro to US Dollar (EUR/USD) exchange rate came under fresh pressure.

Investors saw little incentive to favour the Euro on Thursday as the headline manufacturing PMI dipped from 51.8 to 51.4, hitting its lowest level since February 2016.

This weaker showing does not bode well for the fourth quarter Eurozone gross domestic product, which is also likely to show signs of a slowdown in the wake of the underwhelming PMIs.

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

‘A disappointing December rounds off a year in which a manufacturing boom faded away to near stagnation.

‘The weakness of the recent survey data in fact raises the possibility that the goods producing sector could even act as a drag on the overall economy in the fourth quarter, representing a marked contrast to the growth surge seen this time last year. The last three months of 2018 saw manufacturers report the worst quarterly performance in terms of production since the second quarter of 2013.’

Even though the Italian economy showed some signs of improvement, with its manufacturing PMI unexpectedly edging up from 48.6 to 49.2, this was not enough to shore up the Euro.

Slowing Global Manufacturing Boosts US Dollar (USD) Exchange Rates

A general sense of market risk aversion helped to shore up the US Dollar, meanwhile, as Chinese manufacturing data fell short of forecast.

As China’s manufacturing PMI fell into a state of contraction this prompted investors to pile into safe-haven assets, including the US Dollar.

With signs continuing to point towards a slowdown in the global economy USD exchange rates were encouraged to trend higher, even in the face of underwhelming US data.

While the finalised US manufacturing PMI showed a modest downward revision this failed to weigh down the US Dollar, with investors still waiting for the release of the more established ISM manufacturing index.

Weakening Eurozone Inflation to Drive Euro (EUR) Exchange Rates Lower

Further weakness could be in store for the single currency ahead of the weekend if the Eurozone consumer price index also disappoints.

While the European Central Bank (ECB) adopted a positive outlook on inflationary pressure in its last Economic Bulletin forecasts still point towards an easing of the headline inflation rate.

If inflationary pressure continues to ease on the year, slowing from 1.9% to 1.8%, this is likely to weigh heavily on Euro exchange rates.

As inflation is already trending below the ECB’s 2% target any further easing would give policymakers greater incentive to leave interest rates on hold for longer.

Signs that price pressures within the Eurozone economy are failing to build as policymakers anticipated could leave the EUR/USD exchange rate under pressure.

USD Exchange Rates Vulnerable to Weaker US Manufacturing and Employment Data

However, the mood towards the US Dollar could also deteriorate in the days ahead with the release of the latest ISM manufacturing index and non-farm payrolls report.

While increased global trade tensions have supported USD exchange rates in recent weeks these same worries are expected to drag on the ISM manufacturing index.

Evidence that the US manufacturing sector has lost some of its previous momentum could leave the US Dollar on a weaker footing against its rivals.

With the Federal Reserve already under pressure to take a less hawkish approach to monetary policy any underwhelming data could weigh heavily on the appeal of the US Dollar.

Friday’s payrolls report could also give the Fed incentive to leave interest rates on hold for longer, particularly if earnings data points towards a weaker level of wage growth.

Any slowdown in wage growth would further undermine the case for tighter US monetary policy, offering the EUR/USD exchange rate a rallying point.

Unless the US labour market shows signs of tightening further support for the US Dollar is likely to prove limited.
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