Things were not especially positive for the ‘Greenback’ going into the weekend, as the US Manufacturing PMI for August fell significantly short of expectations to clock in at 52.9 rather than the forecast 53.8. As another indicator that the domestic economy is perhaps less robust than previously assumed, this did not bode well for a September take-off by the Fed, particularly after the previous day’s larger than anticipated increase in Initial Jobless Claims from 272,000 to 277,000.
A raft of improved PMIs from the Eurozone, meanwhile, shored up the common currency as the economic fortunes of the bloc demonstrated a marked upturn. The German Manufacturing PMI in particular proved to be better than expected, rising on the anticipated 51.6 to reach 53.2, and suggesting a distinctly positive economic outlook for the currency union. Building on the disappointing US data, this allowed the EUR/USD pairing to climb further to end the week at a peak of 1.1389.
Black Monday had a major and undeniable impact on the EUR/USD pairing as global stock markets began to rapidly plummet on the back of further turmoil in the Chinese economy. As a drop of 8.5% manifested on the Chinese stock exchange, the largest single day fall of its kind since 2007, a series of panic sell-offs were triggered around the world amidst fears of this being the start of a potential financial crisis. A wave of risk aversion saw traders swiftly abandoning higher-yield commodity currencies to flock to more secure positions, such as the Euro.
Although the US Dollar would normally expect to see significant gains as a result of such uncertainty, being a primary safe-haven currency, the asset was notably bearish. This latest scare on the global stage led many to conclude that a Fed interest rate rise will not be coming any time soon, with some even speculating that the logical next move would in fact be a loosening of rates. The opening of the Dow Jones did not improve the impression, as it hit one of the biggest declines in its history by shedding 1,089 points within the first few minutes of trading. After an initial round of frenzied selling the index did begin to tick up again, however, it still ultimately closed at a distinct loss. With the appeal of the ‘Buck’ thus reduced the EUR/USD exchange rate surged to an eight-month high of 1.1701 before falling back slightly.
While the situation in Chinese markets remained much the same today, the rest of the world has been seeing a definite turnaround in trading. A fresh interest rate cut by the People’s Bank of China (PBoC) this morning buoyed global markets further, with many of the indices expected to recover the majority of their losses by the end of the day. This reversal of fortunes has prompted movement away from the common currency, consequently pushing the EUR/USD pairing down to 1.1454.
A resurgence for the Euro could be in store on Friday, however, with the release of the German Consumer Price Index data. Should this continue to point towards economic stability and improving inflation in the Eurozone’s major economy the single currency could stand to see a substantial boost to return to and consolidate its earlier gains.
Any indications of sentiment from the Fed or suggestions of a probable interest rate hike, on the other hand, may well restore the US Dollar to its bullish form. Positive results on the upcoming Consumer Confidence, Durable Goods Orders or second quarter GDP could at least temporarily overshadow global concerns and fuel renewed speculation.