EUR/USD Exchange Rate Climbs as Latest US Developments Boost Risk Appetite, even though Euro Weak Elsewhere
Global risk appetite has recovered following the latest US developments, which has benefitted the EUR/USD exchange rate even if it is also weakening the Euro versus other peers.
A stronger-than-expected Eurozone trade balance figure for December has failed to support the Euro higher this morning.
Economists had expected to see the seasonally adjusted trade surplus rise from €22 billion to €22.3 billion at the end of 2017, but the trade balance instead clocked in at €23.8 billion, thanks to the pace of exports rising at nearly double the pace of imports.
Exports rose 1.7% month-on-month, compared to growth of 0.7% for imports, with France seeing an impressive 15% rise in exports on November, although Germany and Italy saw a slight dip in the pace of exports.
A speech this morning from European Central Bank (ECB) official Yves Mersch has also had little effect upon the single currency.
The effect of yesterday’s positive Eurozone growth data also appears to have waned, even though quarterly Eurozone, German and Italian GDP data showed that the currency bloc economy continues to perform well – at a ten-year best, in fact.
EUR/USD Exchange Rate Posts Small Gain as Reuters Poll Sees Economists Warning against Tax Cuts
According to economists polled by Reuters, the US government made a mistake in cutting taxes at this point during the business cycle; a finding that has helped the EUR/USD exchange rate make some gains.
The Reuters survey found that economists largely believe that the measures will boost growth and put more pressure on the Federal Reserve to hike interest rates this year; usually something markets want to hear, but not at the moment when global stock markets are roiling.
Equity markets have slumped in response to strong US economic data, due to the fears of both strengthening inflation and the tighter monetary policy that could be implemented to combat it – both of which could harm company earnings and see share prices drop.
This may have a knock-on effect on the US economy and, ironically, see the Fed having to slow the pace of rate hikes. This prospect is driving investors away from USD today, even though the recent solid economic data suggests a strong outlook for the safe-haven currency.
It seems, after a brief window of hoping that the Fed may opt to hike interest rates four times this year, that markets are now back to expecting only three instances of rate rises and this has seen global risk-appetite recover.
Société Générale’s Kit Juckes blames USD weakness on the strength of the global economy, explaining:
‘The biggest single factor undermining the dollar this year has been the improvement in the global economy – a more balanced economic recovery drags investment away from the US and towards more interesting markets.’
This is harming appetite for both the US Dollar and the Euro.
ECB Lautenschläger Speech and US Industry Data Forecast to Create Further EUR/USD Exchange Rate Volatility Today
European Central Bank official Sabine Lautenschläger is due to speak later today and could boost the EUR/USD exchange rate given that she is one of the more hawkish members of the Governing Council.
Lautenschläger has previously warned markets to prepare for tighter monetary stimulus and argued for a fixed end to the enormous quantitative easing programme, so she has form for offering a confident outlook upon monetary policy that pushes the Euro higher.
Today’s US industry data could cause further market volatility that forces investors out of the US Dollar.
Strong readings from the Empire Manufacturing Index, initial and continuing jobless claims, industrial production and manufacturing production reports this afternoon could further support the idea that the US economy is on track for accelerated growth.
This would continue to keep the stock markets wary and therefore cause a pullback from the US Dollar into other stable assets, such as the Euro.
However, the weakness in US data is also prompting investors to return to more risky currencies, such as the Australian Dollar and New Zealand Dollar, so the Euro will see its appeal dented by the rises recorded by high-yield assets.