Euro US Dollar (EUR/USD) Exchange Rate Weakens as German GDP Disappoints
The Euro US Dollar (EUR/USD) exchange rate is struggling at a 19-month low at the end of the week following disappointing German GDP figures and the USD rally through the week’s session.
The US Dollar surged this week on strong US data and a more hawkish than expected Federal Reserve that has left EUR/USD trading at $1.11 on Friday.
Euro (EUR) Pressured by Gloomy German Q4 GDP
The Euro is under more pressure on Friday after German GDP data for the fourth quarter of 2021 indicated a worse-than-expected contraction. Growth fell -0.7%, lower than the -0.3% forecast in the final three months of last year.
The German economy suffered from the Omicron wave of coronavirus, tighter Covid measures, and the ongoing supply chain shortage at the end of 2021.
However, GDP growth for the whole of 2021 was 2.8%, slightly up from estimates of 2.7%, but the German economy still remains 1.5% smaller than before the pandemic.
At the same time, the German government has downwardly revised forecasts for 2022 to 3.6% from 4.1% as the impact of the Omicron variant continues to drag on economic activity.
Meanwhile, the Eurozone economic sentiment indicator for January unexpectedly slumped to a nine-month low.
The data revealed declining confidence in manufacturing, service providers, construction, and consumers, as well as rising price expectations.
News that the French economy rebounded by 7% in 2021 with its strongest growth in 50 years had provided EUR exchange rates with some support at the start of the session, before German data dampened the mood and the US Dollar again gathered momentum.
US Dollar (USD) Surges on Fed and Risk-Off Trade
The US Dollar (USD) is consolidating this week’s significant gains on Friday as risk-off trade and Federal Reserve expectations continue bolstering the ‘Greenback’.
The threat of a Russian invasion of Ukraine continues to fuel risk-off trade that has increased safe-haven demand for the US Dollar.
Tensions continue to escalate following US President Joe Biden’s warning there is a ‘distinct possibility’ Russia will invade next month, and Russia sees ‘little ground for optimism’ to resolve the crisis.
However, the US has called for a UN Security Council meeting to discuss the crisis in an attempt to de-escalate tensions.
Meanwhile, following the Federal Reserve’s increasingly hawkish stance, the US Dollar has benefitted from markets’ shifting expectations for more aggressively monetary policy tightening.
Investors had widely expected four interest rate hikes this year starting in March, but five are now being priced in, as well as an aggressive reduction of the Fed’s asset holdings that total around $9 trillion.
Better-than-expected US GDP figures also boosted USD exchange rates yesterday after revealing growth of 6.9% in the fourth quarter, above forecasts of 5.5%.
The impressive reading provided evidence that the Fed can pursue aggressive monetary policy tightening to combat inflation as the US economy is performing strongly.
Euro US Dollar Exchange Rate Forecast: EUR/USD to Remain at Lows?
The Euro US Dollar exchange rate may remain pinned around its lowest levels since mid-2020 going into the weekend.
The US PCE price index, the Fed’s preferred measure of inflation, is expected to show inflation rose to 5.9% in November, which will likely boost the US Dollar as soaring inflation strengthens the Fed’s case to raise interest rates.
USD exchange rates may face limited headwinds later on Friday afternoon, however, as forecasts point to confirmation that consumer sentiment fell to its second lowest level in a decade in January.
Meanwhile, the Euro looks set to continue struggling at the start of next week, with Eurozone GDP data for the fourth quarter expected to show growth slowed to 0.6% in the final three months of 2021, down from 2.2% in the third quarter.
