Euro US Dollar (EUR/USD) Exchange Rate Trades Erratically
The Euro US Dollar (EUR/USD) exchange rate traded in a mixed range last week as unexpected US inflation data rocked the US Dollar (USD) against its peers. Meanwhile, intermittent risk aversion capped gains for the Euro (EUR) alongside a scarcity of significant economic data from the bloc.
At the time of writing, GBP/USD is trading at $1.0943, having trended broadly lower over the past seven days.
US Dollar (USD) Buoyed by Hawkish Fedspeak
The US Dollar experienced turbulent trading conditions last week as headline consumer inflation increased – albeit by less than expected.
Towards the start of the week, bearish sentiment boosted the ‘Greenback’ against the Euro and several other peers: on Tuesday, USD/EUR hit its highest weekly level. Support for the currency weakened in the afternoon, however, as Federal Reserve speakers struck a dovish tone.
The publication of the latest CPI reading, however, was the main event. On an annualised basis, core inflation decreased – rather than holding at 4.8% – while headline price pressures increased. The data sparked mixed reactions, although hopes for a hawkish Fed response were limited.
Madison Faller, Global Investment Strategist at J.P. Morgan Private Bank, explained:
‘Today’s US CPI report may have shown that headline prices increased for the first time in a year, but that was to be expected given the rise in energy prices from their lows last year. The key is that core inflation still falling – and there’s ample runway for that to continue.’
Subsequently, USD/EUR cratered – but the exchange rate managed to rebound on promising comments from Fed official Mary Daly. Daly assured markets that the central bank had ‘still more work to do’, implying the door wasn’t completely closed on further interest rate hikes.
At the end of the week, US PPI data encouraged further bullish momentum, as both core and headline producer prices increased by more than expected in the year to July.
Euro (EUR) Tumbled on Risk-Off Mood
The Euro weakened against the US Dollar last week, as a bearish market mood pressured the comparatively risk-on currency.
Against other peers, the single currency climbed, representing a safe investment compared with more volatile assets. Against the ultimate safe-haven USD, however, the Euro is the riskier choice.
A relative lack of European data exposed EUR/USD to further losses. On Monday, German industrial production fell by more than expected, sending the exchange rate crashing down; news of Italy introducing a one-off 40% tax on bank profits further weighed on the Euro.
On Tuesday, Germany’s finalised inflation data for July printed as expected, failing to provide the Euro with any meaningful lift. A brief weak spell for the US Dollar helped to boost EUR somewhat: the single currency continued to climb against the ‘Greenback’ into Wednesday.
In the second half of the week, EUR/USD tumbled as attention turned to US inflation data. Although US traders’ response to the release was mixed, the Euro came off worse of the two currencies, given a lack of economic stimuli from the bloc.
Moreover, Euro traders were downcast amid dovish guidance from the European Central Bank (ECB). In its Economic Bulletin article on Thursday, the bank noted:
‘The near-term economic outlook for the euro area has deteriorated… High inflation and tighter financing conditions are dampening spending. The outlook for economic growth and inflation remains highly uncertain.’
EUR/USD Forecast: Full Week of Data to Reverse Losses?
The Euro US Dollar exchange rate may climb this coming week, given a multitude of data releases from the bloc. On the other hand, forecasts predict waning European economic activity, potentially denting EUR trade.
Economic sentiment in the Euro area as a whole is forecast to have deteriorated, although the outlook in Germany looks to have improved according to August’s data. Climbing retail sales in the US could weigh on EUR/USD, but Wednesday’s Eurozone GDP report may subsequently boost the exchange rate.
Elsewhere, central bank rhetoric is likely to have some impact on trade. The latest meeting minutes from the Federal Open Market Committee (FOMC) will be released midweek and subsequently, the ECB’s Philip Lane is due to speak on Friday. If either bank strikes a hawkish tone, EUR/USD could spike in either direction.