Euro US Dollar (EUR/USD) Jumps as Investors Dump US Bonds in Response to China Comments

Broad based selloff of US Dollar Causes EUR/USD Jump

UPDATE: A  selloff of the US Dollar seems to be gathering pace this afternoon as investors dump US Treasury bonds leading to a 0.6% decline in the EUR/USD exchange rate.

Currently one Euro is trading at $1.178, with the US Dollar also falling against most other currencies.

The selloff came after China stated that it would decrease tariffs on imports from a number of countries, but not the US. It also follows a statement made by China that it will not allow its currency to devalue.

Persistent US-China Trade Tensions Support Euro US Dollar (EUR/USD) Exchange Rate

Ongoing tensions between the US and China continued to weigh on the US Dollar (USD) today after a spokesman from China’s foreign ministry criticised the US, saying the country has not been sincere over trade.

This helped to keep the Euro to US Dollar (EUR/USD) exchange rate on a steady footing this morning, with the interbank rate continuing to hover in the region of $1.17.

Although the prospect of fresh trade talks between the world’s two largest economic powers remains limited this has failed to encourage any particular increase in safe-haven demand.

As a result, the US Dollar has struggled to find any significant traction against its rivals, with markets still concerned by the negative impact that tariffs will have on the US economy in the months ahead.

Euro US Dollar (EUR/USD) Exchange Rate to Benefit from Steady Eurozone Growth

Euro (EUR) exchange rates could find a fresh rallying point tomorrow if September’s raft of Eurozone manufacturing and services PMIs prove resilient.

Signs of solid growth within both the manufacturing and service sectors would give investors fresh cause for confidence in the outlook of the wider Eurozone economy, bolstering the appeal of the single currency.

Forecasts point towards the headline PMIs remaining firmly within expansion territory, although the Eurozone manufacturing PMI is expected to experience a slight dip from 54.6 to 54.5.

As long as the Eurozone economy shows no significant signs of coming under pressure from increasing global trade tensions the EUR/USD exchange rate is likely to push higher.

However, after the recent run of disappointing Eurozone data the Euro still looks vulnerable to any downside surprises.

Solid US PMIs Could Prompt EUR/USD Exchange Rate Losses

Reaction to the US manufacturing and services PMIs is likely to prove more limited, meanwhile, as markets tend to take more account of the longer-running ISM sector surveys.

Even so, as both PMIs are forecast to show an improvement on the month this could offer the US Dollar some encouragement ahead of the weekend.

Evidence that the world’s largest economy remains in a relatively robust state of health should limit the downside potential of USD exchange rates in the near term.

As long as trade tensions between the US and China continue to escalate, though, the US Dollar is likely to remain sensitive to any shifts in general market sentiment.

High Odds of Imminent Fed Rate Hike to Limit US Dollar (USD) Exchange Rate Vulnerability

Even if US data disappoints in the days ahead the high odds of the Federal Reserve raising interest rates at its September meeting are not likely to change.

With a fresh rate hike already effectively priced into the US Dollar the scope for greater EUR/USD exchange rate gains looks limited at this stage.

However, USD exchange rates could still come under pressure in the wake of Wednesday’s announcement if the tone of policymakers proves less hawkish.

A more cautious policy outlook would reduce the degree of policy divergence between the Fed and the European Central Bank (ECB), to the benefit of the Euro.

As long as the Fed looks set to hold off from raising interest rates further in the next few months the Euro to US Dollar (EUR/USD) exchange rate is likely to push higher.

Hannah Wilson

Contact Hannah Wilson