On Wednesday the Euro was holding comparatively steady against the Pound following the release of a mixed bag of Eurozone news.
The EUR/USD exchange rate weakened during the European session as investors digested the currency bloc’s PMI and growth reports ahead of tomorrow’s European Central Bank rate decision.
The GDP data showed that the Eurozone’s economy expanded by just 0.2 per cent in the first quarter of the year, in line with estimates but down from revised growth of 0.3 per cent in the fourth quarter of 2013.
Although the Eurozone is currently enjoying considerably more economic, social and political stability than it has seen in recent years, the region’s return to growth has been sluggish and several sectors are struggling to keep up.
Inflation has been a particular concern, and yesterday’s consumer price inflation report showed that inflation slowed to just 0.5 per cent in May – half of the European Central Bank’s 1 per cent target.
Price concerns have resulted in the ECB pledging to take policy action to shore up the Eurozone’s economic recovery, and it is believed that the central bank will introduce new measures tomorrow.
As stated by economist Jennifer McKeown; ‘While the ECB looks set to cut interest rates and announce some lending incentives after its meeting, we think that it will ultimately need to implement a large scale quantitative-easing programme to counter the growing risk of deflation.’
Earlier in the day the Eurozone released its services and composite PMI reports for the Eurozone and its largest economies.
While May’s figures were generally an improvement on April’s, the final results fell short of initial estimates and the French services/composite measures fell into contraction territory.
Markit economist Chris Williamson observed; ‘France remains a major drag on the region’s revival, where the survey data suggest the economy has stagnated in the second quarter. There is even the possibility of a renewed downturn in French GDP if business conditions continue to deteriorate in June.’
The EUR/GBP exchange rate was virtually unaffected by the UK’s own services and composite PMI reports. Both gauges softened last month, but neither fell by as much as economists expected.
If today’s US ADP employment change report shows that the US economy added the number of positions projected, the Euro to US Dollar exchange rate could extend declines before the close of North American trading.
Euro to GBP & USD Update – 04/06/14
As the North American session got underway the Euro eased a little lower against the Pound as investors braced themselves for tomorrow’s European Central Bank rate decision.
The prospect of introducing an interest rate cut or negative deposit rate has largely been priced into the market, but the central bank could come up with a quantitative easing style programme in order to dissipate deflation concerns.
Such an action has the potential to send the Euro into a tailspin.
Consequently, the Euro Pound pairing (which has been trading in a comparatively narrow range all day) eased lower by 0.10 per cent before the close of the European session.
However, the Euro was able to trim previous declines against the US Dollar following the release of a very mixed bag of economic reports for the US.
While the ISM’s non-manufacturing composite gauge rallied from 55.2 in April to 56.3 in May, the Markit services PMI slipped to 58.1 from 58.4 and the Markit composite measure also weakened.
Meanwhile, US non-farm productivity declined by 3.2 per cent in the first quarter and the US economy was shown to have added 179,000 positions in May. It was forecast that the ADP employment change report would reveal an increase of 210,000.
The US trade report also piled pressure on the ‘Greenback’ as it showed that the US posted its largest trade deficit for two years.
The publication of the Federal Reserve’s Beige Book (taking place at 19:00 GMT) could trigger additional Euro to USD movement before tomorrow.
Fluctuations in the Euro to GBP exchange rate will be limited ahead of the central bank announcements.
Big day in store for the Euro – update 05/06/14
The Euro is forecast to experienced significant volatility later in Thursday’s session as investors raise their expectations that the European Central Bank will introduce new monetary easing measures at today’s Central Bank policy meeting in an effort to tackle the threat of deflation in the region.
Analysts are expecting the Bank to cut its benchmark interest rate and set a negative deposit rate for the first time. Some are also suggesting that it could introduce another longer-term refinancing operation in order to counter a fall in liquidity.
Significant losses for the Euro are however not expected by some economists.
“Structurally it’s just very difficult to weaken the Euro. He can raise his finger, he can threaten the market with more action, how much more shall we be surprised? Everybody expects Draghi to do a lot and this is how weak the Euro is getting,” said the president and founder of Palo Alto in a television interview on Bloomberg.
Despite that the implied volatility on one-day options for the EUR/USD exchange rate surged by 22.1%. The Pound too is also expected to rise after it continues to find support from positive economic data releases.
Whether the Euro makes significant downward movement all depends on what measures the ECB decides to implement. All we can do is wait-and-see.
The ECB decision will take place at 12:45 pm GMT.
Euro (EUR) Exchange Rates
[table width=”100%” colwidth=”50|50|50|50|50″ colalign=”left|left|left|left|left”]
Currency, ,Currency,Rate ,
Euro,
,US Dollar,1.3615,
Euro,,British Pound,0.8129,
Euro,,Australian Dollar,1.4670,
Euro,,New Zealand Dollar,1.6175,
Euro,,Canadian Dollar,1.4899,
[/table]
