Signs of Slowing Eurozone Growth Drag Heavily on Euro to US Dollar Exchange Rate
After struggling to hold its ground for most of the week, the Euro to US Dollar (EUR/USD) exchange rate plunged on Friday in reaction to the latest concerning Eurozone data. It followed a dovish tone from the European Central Bank (ECB) on Thursday.
Since opening this week at the level of 1.1390, EUR/USD briefly rose to a three-week-high of 1.1441 at the beginning of the week before sliding.
EUR/USD then spent the week trending with a downside bias, and at the time of writing on Friday had slumped to trend near a December low of 1.1291.
As the latest Eurozone PMI projections indicated that the Eurozone economy was slowing even more than expected towards the end of the year, market Eurozone growth expectations worsened and the Euro (EUR) was sold.
The US Dollar (USD) often benefits from weakness in its rival, the Euro, so Friday’s Eurozone data helped the US Dollar to trend on a stronger note towards the end the week.
Euro (EUR) Exchange Rates Plunge on Slowing Eurozone Growth Expectations
After avoiding major losses for most of the week due to US Dollar (USD) weakness and hopes that the Eurozone economy could rebound slightly in Q4 2018, the Euro slumped on Friday.
Following the publication of Markit’s Eurozone PMI projections for December, which came in much worse than analysts expected, investors sold the shared currency.
The Eurozone’s manufacturing PMI is projected to have slid from 51.8 to 51.4, with services expected to have slumped to 51.4 too, from 53.4.
Overall, the bloc’s composite PMI is projected to have worsened from 52.7to 51.3, well below the expected improvement to 52.8. If projections are accurate, it marked the worst month for Eurozone economic activity in four years.
According to Chris Williamson, Markit’s Chief Business Economist:
‘While GDP growth in the fourth quarter as a whole is indicated at almost 0.3%, the surveys point to quarterly GDP growth momentum slipping closer to 0.1% in December alone. Forward-looking indicators such as new orders and future expectations remaining subdued suggest that demand growth is stalling, adding to downside risks to the immediate outlook.’
It followed the European Central Bank’s (ECB) December policy decision on Thursday, during which the bank cut its Eurozone growth forecasts and predicted months of lower inflation were ahead.
As a result, ECB interest rate hikes for 2019 are low and the Euro has been tumbling.
US Dollar (USD) Exchange Rate Gains on Rival Weakness and Fed Rate Hike Expectations
The US Dollar has been weakening for most of the week, as lightening US-China trade tensions leave investors more willing to take risks rather than keep buying safe haven currencies like the US Dollar.
However, the US Dollar strengthened again towards the end of the week and was climbing at the time of writing on Friday, due to weakness in the US Dollar’s biggest rivals.
As the US Dollar sees a negative correlation with its rival, the Euro, Friday’s Eurozone PMI data and Euro selloff led to stronger demand for the US Dollar.
On top of this, the US Dollar is firming ahead of next week, when the Federal Reserve is expected to make its fourth US interest rate hike of 2018.
However, the US Dollar’s strength is limited too amid uncertainties about how hawkish the Fed will be throughout the next year.
Euro to US Dollar (EUR/USD) Exchange Rate Investors Anticipate Eurozone Data, Fed Decision
Next week could be an influential one for the Euro to US Dollar (EUR/USD) exchange rate, but it may be difficult for the Euro to recover without some kind of solid support.
At the beginning of the week, final November inflation data for the Eurozone, as well as October trade balance data, will be published.
These stats could bolster Euro demand if they beat forecasts. Signs of better than expected Eurozone inflation data would especially bolster the Euro and could improve European Central Bank (ECB) interest rate hike bets.
This will be followed on Tuesday by Ifo’s German business confidence survey for December, as well as US building and housing stats from November.
Perhaps the biggest event of the week however, will be Wednesday’s Federal Reserve policy decision.
Markets widely expect the Fed will hike US interest rates during the decision, but extra attention will be given to the bank’s US economic outlook and any change in tone regarding the bank’s 2019 monetary policy outlook.
