Update 2: Hawkish Meeting Minutes from the Federal Reserve Knocked Euro to US Dollar Exchange Rate Lower
On Wednesday evening, the Fed report indicated that policymakers were becoming increasingly confident that US inflation would rise in the year ahead.
Markets are now pricing in at least three Fed interest rate hikes throughout 2018 and this has boosted US Dollar (USD) demand.
Notably, the minutes showed that many policymakers’ US economic outlooks had risen since December.
The US Dollar easily advanced against the Euro (EUR), as Thursday’s Eurozone ecostats largely fell short of expectations.
Update 1: Eurozone PMIs Fell Short of Expectations, Keeping Pressure on Euro to US Dollar Exchange Rate
Wednesday saw the publication of Markit’s February PMI projections for the Eurozone, and while they continued to indicate strong growth across the bloc the figures largely fell short of expectations.
Germany’s manufacturing PMI fell from 61.1 to 60.3 rather than the expected 60.6, while the Eurozone’s overall composite PMI came in at 57.5, a whole point short of the forecast 58.5.
As a result of the data, the US Dollar (USD) was more easily able to continue this week’s climb against the Euro (EUR).
EUR/USD Exchange Rate Suffers as Investors Pile Back Into US Dollar
Despite some solid Eurozone confidence data on Tuesday, the Euro to US Dollar (EUR/USD) exchange rate continued to slide as investors continued to return to the US Dollar (USD).
Last week saw EUR/USD touch on an interbank high of 1.25, the pair’s best level in over three years. Since then though, investors have been buying the US Dollar from its lows and this has pushed EUR/USD back down to the interbank level of 1.23.
Recent US data has been solid which has helped the US Dollar to extend its recovery, though so far the Euro to US Dollar (EUR/USD) exchange rate is still higher than it was a week ago.
Movement has been largely due to the US Dollar’s rebound, as well as a lack of any notable changes in the Eurozone outlook lately.
Euro (EUR) Exchange Rates Weaken Amid Mixed Eurozone Confidence Stats
Tuesday saw the publication of some notable confidence stats from the Eurozone, amongst other less influential reports.
ZEW published its February economic sentiment survey. Germany’s economic sentiment index beat expectations with a figure of 17.8, as did the overall Eurozone print which came in at 29.3.
However, investors were slightly disappointed by the German current conditions print, which slipped from 95.2 to 92.3 rather than the forecast 93.9.
ZEW noted that turbulence in global equity markets, as well as political uncertainty in Germany, have weighed on German confidence.
Analysts are still generally optimistic about Germany’s economic outlook though. According to ZEW President Professor Achim Wambach:
‘The latest survey results continue to show a positive outlook for the German economy. The assessment of the current economic situation is still on a very high level and the economy is expected to improve in the coming six months.’
US Dollar (USD) Strength Limited by Deficit and Inflation Uncertainties
While the US Dollar has been recovering from its worst levels in years against the Euro, the currency’s gains have been limited by uncertainties about the economy.
Analysts argue that the US Dollar’s potential is weighed down by concerns about the growing deficit and the future of US inflation, amid a US Dollar bear market.
Expectations of a surge in US government spending, as well as the recent corporate tax cuts, have added to concerns about the US budget deficit.
There are also concerns that the US economy could be overheated by the government’s fiscal policy plans, if inflation rises above the target level.
Euro to US Dollar (EUR/USD) Forecast: Investors Anticipate Markit’s PMI Projections
Wednesday will see the publication of some notable Eurozone and US ecostats which could cause a shift in Euro to US Dollar (EUR/USD) exchange rates towards the end of the week.
Markit will publish its February PMI projections for the Eurozone and the US throughout the day. The Eurozone’s PMI projections have the potential to be particularly influential.
If Eurozone PMIs are projected to perform even stronger in February than expected, the growth outlook could improve even further, which could help the Euro to avoid losses against a recovering US Dollar.
Markit’s US PMI projections could influence USD movement slightly, but investors are anticipating the Federal Reserve’s latest meeting minutes report more.
Amid market uncertainties about the US deficit and the government’s fiscal policy plans, any comments from the bank on the deficit or inflation could inspire movement in the US Dollar.
Several Fed officials will be holding speeches this week too, so it’s likely that Federal Reserve speculation could drive USD trade more than US data in the coming days.