It has been a particularly volatile week for the Euro to US Dollar exchange rate, as stock market turmoil saw traders piling into lower-risk currencies in an attempt to mitigate the impact of increasing global slowdown fears. Following unimpressive Chinese Manufacturing and Services PMIs the Shanghai Composite Index was closed early twice after 7% drops triggered the newly implemented circuit breaker mechanism. While the ‘Greenback’ was boosted as a result of the Yuan (CNY) hitting a fresh five-year low, it was ultimately the Euro that was buoyed higher by the pronounced market turbulence.
Monday’s raft of Eurozone Manufacturing PMIs initially bolstered the single currency across the board, with all members of the currency union posting growth for the first time in twenty months, suggesting that domestic conditions had firmed. While French manufacturing proved a little more disappointing than expected, this was countered by a surprisingly bullish Greek result as the Hellenic nation edged over the neutral baseline to enter a state of expansion. Some of this optimism was lost later in the day, though, as Germany’s Consumer Price Index failed to improve as forecast.
Inflationary pressure in both Germany and the wider Eurozone remained weak in December, disappointing pundits who had hoped to see an uptick on the year. With inflation within the currency union holding steady at just 0.2%, far short of the European Central Bank’s (ECB) 2% target, the economic health of the Eurozone was rapidly placed back in doubt. This naturally increased the odds that the ECB will be prompted into further monetary loosening measures over the coming months, a prospect that severely dented the appeal of the Euro on Tuesday.
However, weaker showings on the ISM Manufacturing and Non-Manufacturing Composite indexes meant that the US economy was also speculated to be suffering from a slowdown. Some investors have continued to suggest that the Federal Open Market Committee (FOMC) might have been overly hasty in choosing to hike interest rates in December, as the stronger US Dollar weighs on productivity. Consequently the EUR/USD exchange rate went on to regain most of its recent losses throughout the latter half of the week.
While the German Trade Balance was found to have narrowed by less than forecast on Friday, to 20.6 instead of 20.2 billion, this was not a sufficiently positive figure to prevent the single currency returning to a downtrend. Unimpressive Industrial Production figures equally weighed on the EUR/USD pairing, which saw a particularly sharp slump in response to an unexpectedly strong US Non-Farm Payrolls report. 290,000 new jobs were revealed to have been added to the world’s largest economy in December, surpassing estimates and reassuring those who had doubted the Fed’s recent policy move. Nevertheless, as wages did not edge higher as pundits had anticipated this report failed to shore up the ‘Greenback’ for long.
Although weaker Industrial Production may reduce demand for the Euro, the EUR/USD exchange rate is likely to remain on an uptrend this week if Germany’s annual GDP is shown to have expanded in 2015, with investors expecting a modest uptick from 1.6% to 1.7%. With Friday’s US Advance Retail Sales forecast to demonstrate a contraction on the month in December the US Dollar may struggle to advance over the coming days.