Euro to US Dollar Exchange Rate Forecast: Rising US Hourly Earnings Boost Hopes for More Hawkish Fed Outlook

Update: US Dollar Traction Limited as Unemployment Rate Sticks at 4.1%

Some disappointment greeted the latest US labour market data, with the headline unemployment rate failing to drop to 4.0% as forecast.

This offered some support to the Euro to US Dollar (EUR/USD) exchange rate ahead of the weekend, even though the pairing still struggled to gain any particularly strong momentum.

As the average hourly earnings figures picked up as forecast markets remain confident that the Federal Reserve will continue to pursue a more aggressive pace of monetary tightening over the coming months, limiting the downside of the US Dollar (USD).

US-China Trade Tensions Limit EUR/USD Exchange Rate Downside

Even though trade tensions between the US and China continued to heat up, this has failed to give any particular support to the Euro to US Dollar (EUR/USD) exchange rate.

With the White House reportedly drawing up plans for a further 100 billion Dollars’ worth of tariffs in response to China’s proposed retaliatory measures, the situation looks set to escalate further.

While there are concerns over the significant negative impact that a full-blown trade war could have on the US economy, though, the US Dollar (USD) only saw limited losses in the wake of this latest move.

Markets remain hopeful that backchannel talks could still avert any actual trade action, with the possibility of a negotiated settlement helping to limit the negative impact of the Trump administration’s continued protectionist rhetoric.

Weakening Eurozone Economic Activity Weighs Heavily on Euro Demand

The mood towards the Euro (EUR), meanwhile, remained limited by the relatively weak run of recent Eurozone data, keeping the EUR/USD exchange rate under pressure.

Investors were not encouraged to find that March’s raft of retail PMIs had softened markedly on the month, with the Italian service sector falling back into a state of contraction.

This added to market concerns that the Eurozone economy is generally coming off the boil, unable to sustain its earlier bullish momentum into 2018.

With German industrial production also found to have contracted sharply on the month in February there appeared to be little reason to favour the Euro ahead of the weekend.

All in all, this suggests that the European Central Bank (ECB) is unlikely to return to a more hawkish policy outlook in the months ahead, to the detriment of EUR exchange rates.

EUR/USD Exchange Rate Volatility Forecast as Markets Brace for US Labour Market Data

This afternoon’s US jobs data could see the EUR/USD exchange rate losing fresh ground, with forecasts pointing towards a dip in March’s unemployment rate.

If the US labour market shows fresh signs of tightening this is likely to encourage bets that the Federal Reserve could still approach monetary policy more aggressively over the course of 2018.

Speculation that policymakers could raise interest rates a further three times before the end of the year, rather than the two currently forecast, may give the US Dollar a strong boost.

A fresh uptick in average hourly earnings would offer investors further incentive to pile into the US Dollar, with rising wages likely to encourage the Fed to take a more hawkish outlook.

However, USD exchange rates look vulnerable if the non-farm payrolls report highlights remaining slack within the labour market.

Wider German Trade Surplus Forecast to Boost EUR Exchange Rates

A rallying point could be in store for the EUR/USD exchange rate on the back of Monday’s German trade data, though.

As forecasts point towards a widening of the trade surplus the appeal of the Euro could well pick up, benefitting from increased confidence in the outlook of the Eurozone’s powerhouse economy.

Any rebound in export volumes is likely to be greeted positively by investors, particularly if the accompanying imports figure shows less of an improvement on the month.

While the German economy may not be able to hold onto its bullish trend of growth in 2018 the EUR/USD exchange rate could still capitalise on any signs of positivity.

Hannah Wilson

Contact Hannah Wilson