Euro US Dollar (EUR/USD) Exchange Rate Drops as Greenback Rebounds
The Euro US Dollar (EUR/USD) exchange rate dropped sharply through last week’s trading session as upbeat US data buoyed the US Dollar (USD). Meanwhile, the Euro (EUR) faced multiple headwinds including rising unemployment in Germany and evidence of persistent price pressures.
At the time of writing, EUR/USD is trading at $1.0940, having fallen by almost a full percentage point in the past seven days.
US Dollar (USD) Firms amid Growing Risk Aversion
The US Dollar rose against the majority of its peers last week, bolstered by bearish sentiment. A lack of significant data on Monday due to the New Years Day holiday led the ‘Greenback’ to climb against perceived-riskier currencies.
Into Tuesday, USD continued to firm, although gains were capped during the European afternoon by the release of December’s finalised manufacturing PMI from S&P Global. The reading printed at 47.9, 0.3 points below expectations and a fall on November’s 49.4.
Midweek, the latest meeting minutes from the Federal Open Market Committee (FOMC) cast a shadow over US Dollar morale, indicating that the central bank believes interest rates are near their peak.
USD/EUR continued to weaken through Thursday morning, but resumed an upward trend during the afternoon as initial jobless claims were fewer than expected for the week ending 30 December. ADP’s chief economist, Nela Richardson, observed:
‘We’re returning to a labour market that’s very much aligned with pre-pandemic hiring. While wages didn’t drive the recent bout of inflation, now that pay growth has retreated, any risk of a wage-price spiral has all but disappeared.’
At the end of the week, ‘Greenback’ gains were extended initially as December’s nonfarm payrolls data printed at 216K rather than the 170K forecast. In the afternoon, however, USD faced new headwinds as the latest ISM services PMI missed expectations, printing dangerously close to contraction territory at 50.6.
Euro (EUR) Dented by Weak Economic Data
The Euro trended broadly lower against the US Dollar on Monday, although experienced a brief uptick during the morning.
On Tuesday, better-than-expected finalised manufacturing PMIs from both Germany and the Eurozone failed to buoy the single currency, as activity in the sector remained in contraction in both instances.
German unemployment data influenced EUR movement as Wednesday’s session opened, triggering a further downtrend for EUR/USD. The number of individuals registering as jobless was fewer than expected, but the country’s unemployment rate nevertheless rose from 5.8% to 5.9%.
Moreover, brief strength in the ‘Greenback’ ahead of the release of December’s FOMC minutes depressed the Euro, given the two currencies’ strong negative correlation.
EUR managed to recoup some of its losses on Thursday, buoyed by finalised service-sector PMIs from Germany and the bloc. Both indexes printed above estimates, inching closer to expansion. Furthermore, German inflation was shown to have risen in the European afternoon, which may have triggered hopes of a more hawkish European Central Bank (ECB).
On Friday, however, the Euro staged an initial downturn – driven perhaps by a warning from the ECB’s Christine Lagarde. Lagarde warned of higher price pressures for longer amid persistent inflation; yet her words did not prevent EUR from climbing against the ‘Greenback’ during afternoon trade.
EUR/USD Forecast: US Inflation to Drive Exchange Rate?
Into the new week, US Dollar investors will be looking ahead to Thursday’s inflation release. Annualised core inflation is expected to have eased to 3.8% in December, potentially depressing USD if it incites expectations of an imminent interest rate cut from the Federal Reserve.
Earlier in the week, an improvement in economic sentiment in the Eurozone could boost the single currency, although falling retail sales may cap gains. If the bloc’s unemployment rate is shown to have remained unchanged on Tuesday, investors may take heart from apparent resilience in the labour market.
At the end of the week, following Thursday’s US inflation release, PPI data from the world’s largest economy might inspire subsequent movement in the Euro US Dollar exchange rate. If producer prices increased in December, fears of an interest cut from the Federal Reserve may be reduced as price pressures are shown to persist.