- Euro bullish despite poor Eurozone Manufacturing PMIs – Slower growth and weak inflation raise odds of additional ECB easing
- ICM telephone poll gave lead to ‘Leave’ campaign – Renewed ‘Brexit’ worries weighed on Pound
- Mixed domestic data weakened US Dollar – Speculation over chances of imminent Fed rate hike continued
- EUR/USD exchange rate remained strong despite improved ISM Manufacturing Index – Talk of June rate move continued due to mixed report
Euro (EUR) Demand Bullish as Chances of ECB Easing Minimal
Ahead of the European Central Bank (ECB) policy decision the appeal of the Euro (EUR) has remained relatively strong against rivals, as markets expect little of substance from the meeting. As a result the Euro to US Dollar (EUR/USD) exchange rate was trending higher around 1.1216, while the Euro to Pound Sterling (EUR/GBP) pairing was ceding ground in the region of 0.7764.
(Previously updated at 17:02 on 01/06/16)
Stronger US Data Failed to Weaken EUR/USD Exchange Rate
Confidence in the US Dollar (USD) remained muted on Wednesday afternoon in spite of a stronger-than-expected ISM Manufacturing Index, which climbed from 50.8 to 51.3 in May. As new orders and employment measures remained discouraging the Euro to US Dollar (EUR/USD) exchange rate trended higher in the region of 1.1164.
(Previously updated at 14:21 on 01/06/16)
Euro (EUR) Exchange Rate Trends Higher despite Disappointing Eurozone PMIs
Markets were encouraged to find that the German Unemployment Rate had unexpectedly fallen to a fresh low of 6.1% in May, showing the robustness of the labour market in the Eurozone’s powerhouse economy. The bullishness of this data was soon overshadowed, however, by the news that the Eurozone at large had remained in negative inflation in May. Although the latest Consumer Price Index edged higher from -0.2% to -0.1% this nevertheless dampened some of the sentiment towards the Euro (EUR) on Tuesday.
The latest raft of Eurozone Manufacturing PMIs also proved less than encouraging, with growth across the currency union slowing to its weakest rate since February. Although France showed some improvement on the month, the general picture remained discouraging, with slowdown pressures seeming to weigh heavily on growth. Nevertheless, this failed to particularly dent demand for the single currency on Wednesday, with the Euro continuing to benefit from the softness of the US Dollar (USD) and markets remaining sceptical of the chances of further European Central Bank (ECB) policy loosening.
Increased Support for ‘Brexit’ Prompted Sharp Pound Sterling (GBP) Exchange Rate Slump
Investors have generally moved away from the Pound (GBP) following the latest EU referendum poll, which indicated that the gap between the ‘Remain’ and ‘Leave’ campaigns may be narrower than previously assumed. Consequently, Sterling entered a strong slump across the board, as increased ‘Brexit’ uncertainty encouraged a fresh round of profit taking. As Derek Halpenny of MUFG noted:
‘Part of the growing confidence of a vote to ‘Remain’ has been the steady flow of results from telephone polling in favour of ‘Remain’ with pollsters conducting studies pointing to telephone polling as being more accurate. The ICM telephone poll result yesterday had ‘Remain’ on 42% and ‘Leave’ on 45%. It is the first telephone poll we can find that has ‘Leave’ ahead of ‘Remain’.’
This shift in support towards the ‘Leave’ camp continued to weigh on the Pound on Wednesday morning, in spite of the latest UK Manufacturing PMI proving positive. The measure surpassed expectations to edge higher from 49.4 to 50.1, suggesting that pressure on the domestic economy somewhat eased in the last month. Nevertheless the Euro to Pound Sterling (EUR/GBP) exchange rate strengthened further, with the appeal of Sterling likely to remain muted in the near future.
Weaker US Manufacturing Data Forecast to Weigh on US Dollar (USD) Demand
Members of the Federal Open Market Committee (FOMC) continued to take a more hawkish view on monetary policy in recent days, with St Louis Federal Reserve President James Bullard expressing a belief that markets are largely prepared for a summer rate hike. Doubts still remain over the likelihood of the Fed actually pulling the trigger on interest rates imminently, however, as US data has proved rather more mixed. Although the April Personal Consumption Expenditure Core indicated continued strength in domestic inflation this was contrasted by a sharp decline in the latest Consumer Confidence Index and Dallas Fed Manufacturing report.
Signs of weakness within the US manufacturing sector have consequently raised concerns ahead of this afternoon’s ISM Manufacturing Index, which could well surprise on the downside in light of recent data. This would raise further doubts over the likelihood of the Fed raising interest rates in the near future, particularly if Friday’s Non-Farm Payrolls report also fails to demonstrate particular strength.
Current EUR, GBP, USD Exchange Rates
At the time of writing, the Euro to Pound Sterling (EUR/GBP) exchange rate was making gains at 0.7714, while the Euro to US Dollar (EUR/USD) pairing was trending higher in the region of 1.1159. Meanwhile, the Pound Sterling to US Dollar (GBP/USD) exchange rate was slumped around 1.4454.
