German Export Contraction Weighs on Euro US Dollar (EUR/USD) Exchange Rate
A surprise contraction in German export volumes saw the Euro (EUR) come under fresh pressure this morning, with confidence in the health of the Eurozone’s powerhouse economy weakening.
Defying forecasts of a 0.3% uptick exports instead slumped -0.8% on the month in September, indicating that the German economy continues to feel the effects of slowing global trade.
Although imports also saw a decline on the month this was not enough to prevent the trade surplus from narrowing.
As Carsten Brzeski, Chief Economist at ING, commented:
‘German exports have now dropped in four out of the last six months. At the same time, imports decreased by 0.4% MoM, which narrowed the trade balance to €17.6 billion from €18.2 billion.
‘Today’s trade data ends a disappointing week for German industry. Available monthly data suggests that the economy had its worst quarterly performance in 3Q since the beginning of 2015.’
With the German economy appearing increasingly sluggish the Euro to US Dollar (EUR/USD) exchange rate failed to hold onto the gains seen in the wake of the US midterm elections.
US Dollar (USD) Demand Muted Ahead of Federal Reserve Announcement
Demand for the US Dollar (USD) remained largely muted, however, as markets anticipate two years of political gridlock now that the Democrats control the House of Representatives.
Investors were also reluctant to pile into the US Dollar ahead of the Federal Open Market Committee’s (FOMC) November policy announcement.
Even though no change in monetary policy is expected at this stage the tone of policymaker commentary could move markets.
As long as the Fed appears to remain on course to raise interest rates at its December meeting the downside potential of USD exchange rates should prove limited.
Any indication that the central bank is likely to take a less aggressive approach to raising interest rates over the course of the next year, though, may encourage another bout of US Dollar selling.
Weaker US Consumer Confidence to Boost EUR/USD Exchange Rate
The EUR/USD exchange rate could find some additional support ahead of the weekend on the back of November’s University of Michigan consumer sentiment index.
Forecasts point towards a modest easing of the index from 98.6 to 97.9, a decline which may still put pressure on the US Dollar.
Weakening domestic confidence could put a dampener on economic growth in the months ahead.
On the other hand, if sentiment holds up this may encourage the US Dollar to regain further ground on Friday.
Political developments look set to remain a key influence on the EUR/USD exchange rate in the near term.
If the loss of the House spurs the Trump administration to pursue a tougher line on international trade this could weigh heavily on demand for the Euro.
Unless there are signs that the US and China are moving towards a de-escalation of trade tensions the Euro to US Dollar (EUR/USD) exchange rate may come under increased pressure.