Following a quieter holiday season the Euro to US Dollar exchange rate has started 2016 with a fresh bout of volatility after Chinese stock market turmoil provoked trader alarm. Monday saw the Shanghai Composite closed early due to shares having fallen by the maximum 7% permitted for a session, prompting a sharp rise in safe-haven demand that benefitted the single currency in particular. Chinese Manufacturing PMI also printed at a lower level than expected, 48.2 rather than 48.9, signalling that the world’s second largest economy continued to experience contraction in December. With global slowdown concerns on the rise once more this saw the US Dollar retreat somewhat due to speculation that the Federal Open Market Committee (FOMC) might have acted too early in raising interest rates last month.
The Euro was also bolstered as a result of a raft of solid Eurozone Manufacturing PMIs, which saw all members of the currency union report growth for the first time in twenty months. While France did disappoint slightly this was outweighed by Greece’s unexpected return to expansion, suggesting that the Eurozone was faring better in shaking off negative headwinds than previously thought. However, as the afternoon’s German Consumer Price Index fell short of expectations it was not long before the EUR/USD pairing returned to a downtrend.
Inflationary pressure failed to mount in either Germany or the wider Eurozone in December, lending strength to the case for further monetary loosening from the European Central Bank (ECB). This prospect has done little to improve the appeal of the single currency, although traders nevertheless remain wary of ECB policymakers’ ability to implement wider easing measures in order to stimulate the local economy.
Investors were somewhat concerned to learn that the US ISM Manufacturing Survey had unexpectedly slipped at the end of 2015, printing at 48.2 as opposed to 49. As domestic manufacturing production moved further into contraction territory and Construction Spending also showed a decline on the month, the health of the world’s largest economy seemed rather more in question. However, as Tuesday saw an intervention from Beijing to prop up the Shanghai Composite the ‘Greenback’ remained on more dominant form.
As the Yuan hit a five-year low early on Wednesday the US Dollar experienced another strong surge in demand, particularly as geopolitical tensions continue to mount in the Middle East and North Korea announced its apparent testing of a hydrogen bomb. While the Euro also saw some buoyance during the morning on the back of Eurozone’s Composite PMI reaching a four-and-a-half-year high this was counteracted by a stronger-than-expected US ADP Employment Change figure. In December 257,000 new jobs were added to the private sector, a strong showing that could bode well for Friday’s Non-Farm Payrolls.
Tonight’s FOMC meeting minutes from December are likely to prompt further movement for the EUR/USD exchange rate, with any signs of more hawkish sentiment amongst policymakers likely to bolster the appeal of the US Dollar further.