Demand for the Euro remained limited in the wake of an unexpected dip in the German GfK consumer confidence index.
As the measure weakened from 10 to 9.8 this did not offer much encouragement for the outlook of the Eurozone’s powerhouse economy.
Coupled with January’s sharply narrowed current account surplus this gave investors little reason to favour the single currency.
The tone of the European Central Bank (ECB) has remained neutral to dovish in recent comments, suggesting that monetary policy is likely to remain loose for longer.
As Tim Riddell, research analyst at Westpac, noted:
‘Hard EU data are improving (even if lagging strong surveys) and led the ECB to reduce deflation risks. Nevertheless, core inflation remains stubbornly low and must lift to elicit a shift in policy rates. However, potential for policy change is likely to be contained while political risk and economic vulnerability persist.’
While signs continue to point towards National Front leader Marine Le Pen losing out in the French presidential election the risk of another populist upset remains.
Friday’s raft of Eurozone PMIs could put additional pressure on the Euro, with forecasts pointing towards slowed growth.
Any signs of weakening could weigh on EUR exchange rates, even if the manufacturing and service sectors remain in a state of expansion.
Confidence in the US Dollar, meanwhile, diminished as February’s existing home sales data fell short of expectations.
Sales showed a surprisingly large slump of -3.7% on the month, suggesting that domestic sentiment has started to weaken.
This could limit the appeal of the ‘Greenback’ further if the corresponding new home sales figure proves equally discouraging.
A weaker housing market, and consumer confidence, could encourage the Federal Reserve to pursue a more gradual pace of monetary tightening.
Volatility could be in store for the EUR USD exchange rate as markets await the latest public appearance of Fed Chair Janet Yellen.
Investors will be vigilant for any perceived signs of hawkishness, even though Yellen is not expected to offer any particular policy guidance at this juncture.
Commentary from other members of the Federal Open Market Committee (FOMC) will also be in focus ahead of the weekend.
With durable goods orders forecast to have slowed somewhat in February, however, the outlook of the Fed is likely to remain more cautious.
The US Dollar could also come under pressure if confidence in the US administration weakens.
Market expectations for Trump to deliver on fiscal stimulus pledges could flounder if the Republican healthcare bill fails to pass.
On the other hand, a success here could see the EUR USD exchange rate slump sharply on the prospect of further US economic reforms.
Current EUR USD Interbank Exchange Rates
At the time of writing, the Euro US Dollar exchange rate was trending narrowly in the region of 1.07. Meanwhile, the US Dollar Euro exchange rate was making modest gains at 0.92.
