Euro US Dollar (EUR/USD) Exchange Rate Drops as Eurozone Manufacturing Decline Worsens

October 24, 2019 - Written by Frank Davies

STORY LINK Euro US Dollar (EUR/USD) Exchange Rate Drops as Eurozone Manufacturing Decline Worsens

Contracting Eurozone Manufacturing Sector Keeps Euro US Dollar (EUR/USD) Exchange Rate on Back Foot

As the German and Eurozone manufacturing sectors remained trapped in contraction territory the Euro to US Dollar (EUR/USD) exchange rate shed fresh ground.

Investors were particularly concerned by the latest signs of weakness from the Eurozone’s powerhouse economy, which looks increasingly at risk of recession.

Commenting on the German figures Phil Smith, Principal Economist at IHS Markit, noted:

‘Hopes of a return to growth in Germany in the final quarter have been somewhat dashed by the October flash PMI numbers, which show business activity in the Eurozone’s largest economy contracting further and underlying demand continuing to soften.’

Coupled with another dovish European Central Bank (ECB) policy meeting this left investors with little reason to favour the Euro on Thursday.

Durable Goods Orders Slump Fails to Dent US Dollar (USD) Exchange Rates

Although the US durable goods orders figure showed a sharper decline than forecast this was not enough to drive the US Dollar down.

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While the -1.1% decline in orders on the month suggests that consumers are taking a less optimistic outlook in the fourth quarter USD exchange rates remained on a generally positive footing.

With the week’s earlier sense of market risk appetite fading the safe-haven US Dollar found fresh support across the board.

USD exchange rates also benefitted from a better-than-expected Kansas Fed manufacturing index, which clocked in at 8 rather than 4 in October.

US Dollar Vulnerable as Markets Brace for Federal Reserve Interest Rate Cut

Even so, markets still widely expect to see the Federal Reserve cut interest rates at next week’s monetary policy meeting.

Although the impact of a rate cut is already largely priced into USD exchange rates at this stage mounting anticipation ahead of the meeting could still weigh on the US Dollar.

As long as the Fed looks set to maintain a dovish policy bias in the months ahead, leaving the door open for additional monetary loosening, the upside potential of USD exchange rates may prove muted.

However, if Fed policymakers prove increasingly divided over the prospect of lower interest rates this could see the EUR/USD exchange rate falter.

Fresh Signs of Weakening German Business Confidence to Drag EUR Exchange Rates Lower

The mood towards the Euro, meanwhile, could weaken further ahead of the weekend on the release of October’s IFO business sentiment survey.

Fresh evidence of weakening German business confidence may drag the single currency lower across the board, given the already underwhelming economic outlook.

As long as signs continue to point towards a slowdown within the Eurozone’s powerhouse economy support for EUR exchange rates is unlikely to improve.

On the other hand, any uptick in business sentiment could encourage the EUR/USD exchange rate to return to a positive footing in the short term.

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TAGS: Euro Forecasts