Eurozone Inflation LOOMS – What can we expect for the Euro US Dollar (EUR/USD) Exchange Rate?
Tomorrow will feature the Eurozone’s highly anticipated consumer price inflation result for April, with a fall expected from 1.3% to 1.2% year-on-year.
The monthly reading is also expected to disappoint with a drastic fall from 1.0% to 0.3%.
If this occurs then it would be yet another substantial step away from the ECB’S target range – with the potential to cripple demand for the Euro (EUR) in the meantime.
In this regard, the near-term outlook for the EUR/USD exchange rate is rather poor, with the US Dollar seen as the more attractive option for the foreseeable future.
Eurozone GDP Proves Mixed – Euro US Dollar (EUR/USD) Exchange Rates Come under Pressure
The Euro US Dollar (EUR/USD) exchange rate tumbled on Tuesday, falling as markets reacted to mixed Euro-area data releases, fresh optimism over the US Federal Reserve tightening monetary policy and a solid rise in US retail sales.
According to new figures, the Euro-area economy grew by 0.4% in Q1 2018, down from 0.7% in Q4 2017 but on-par with expectations.
The yearly reading remained at a score of 2.5%.
These poor results were largely due to a drop in foreign trade, although severe weather conditions in the first quarter and stagnation in political spending also contributed.
Indeed, the German Federal Ministry for Economic Affairs claimed that the five-month hiatus during coalition negotiations had weighed on growth.
In other slightly better news, the Eurozone’s ZEW economic sentiment survey saw a surprising rise in May from 1.9 to 2.4, though this was tempered by a contraction in the German ZEW reading.
Ultimately, this news leaves an adjustment in the European Central Bank’s (ECB) bond-buying programme still firmly off the table, making the US Dollar the more attractive option for investors.
US Retail Sales Climb for Second Straight Month – US Dollar (USD) Exchange Rates Bolstered
The ‘Buck’ (USD) continued to rally against the Euro on Tuesday, supported by another rise in US retail sales.
According to the US Commerce Department, headline sales increased by 0.3% in April month-on-month, in-line with analyst expectations but down from the revised March print of 0.8%.
This report nonetheless reassured investors that the weakness seen at the start of 2018 was simply a blip.
It also provided substantial momentum to the US Dollar, which hit a 5-day high against a basket of its peers.
James Knightley, Chief International Economist at ING shared his thoughts on the results:
‘Retail sales have been difficult to interpret for much of the past year. Now that these distortions are out the way we expect upcoming data to show households continuing to spend strongly.
Employment is rising, wages are growing and tax cuts means there is more cash in people’s pockets.
In turn, this leads us to look for a further three Federal Reserve rate rises in 2018.’
US Fed Liable to Raise Rates to 3% – Euro US Dollar (EUR/USD) Exchange Rate Forecast Darkens
The overall outlook for the Euro US Dollar (EUR/USD) exchange rate is looking rather gloomy, with hawkish comments yesterday from Cleveland Fed President Loretta Mester driving rate hike expectations for the US Fed even higher.
Speaking in Paris, France, Mester asserted that the Federal Reserve may have to raise interest rates to a restrictive level in order to meet the goals of stable inflation and low unemployment.
Mester stated:
‘As the expansion continues, it could be that in order to maintain our policy goals, we may need to move the Fed funds rate, for a time, a bit above the level of the funds rate that is expected to prevail over the longer run’.
The median forecast for Fed officials puts the longer-run neutral level of the fed funds rate at 3%, whilst Mester herself noted that the Fed’s latest ‘dot-plot’ sees the rate rising above 3% in 2020.
She continued:
‘Of course, 2020 is a long time away, and the policy path actually followed will be responsive to changes in the outlook.’
This positions the US Fed as the more hawkish option compared to the dovish ECB, and would seem to increase the likelihood of a US rate hike in June.