Disappointing Eurozone producer price index figures put increased pressure on the Euro, further undermining confidence in the outlook of the domestic economy.
Producer prices contracted by -0.4% on the month in May, pointing towards a continued softening in domestic inflationary pressure.
This naturally dented market hopes that the European Central Bank (ECB) will take a more hawkish view on monetary policy in the coming months, given that policymakers had previously expressed discontent over inflation.
Analysts at Goldman Sachs maintain a bearish view, noting that they:
‘(…) expect no change in policy rates or asset purchases for the remainder of 2017. We expect the ECB to taper its asset purchases gradually during 2018 (with an announcement of this sometime in the autumn). We do not expect a rate hike until 2019 (even if risks are skewed to an earlier hike should economic growth and inflation surprise positively relative to our expectations).’
If Thursday’s ECB meeting minutes add weight to speculation that the central bank will remain on hold for the foreseeable future this could weaken the Euro US Dollar exchange rate further.
On the other hand, if there are signs that policymakers are indeed shifting their outlook towards greater hawkishness the appeal of the Euro could improve dramatically.
However, disappointing Eurozone data could limit the upside potential of EUR exchange rates in the coming days, particularly if Germany fails to show signs of stronger economic growth.
US Dollar Could Strengthen on Hawkish Fed Minutes and Payrolls Report
Even though the US markets closed for Independence Day this failed to particularly dent the US Dollar, which remained buoyed in the wake of an unexpectedly strong ISM manufacturing index.
The odds continue to point towards the Federal Reserve raising interest rates again at its July meeting, encouraging investors to support the ‘Greenback’.
Increased volatility is likely in store for the EUR USD exchange rate with the publication of the Federal Open Market Committee’s (FOMC) June meeting minutes, which should shed greater light on the prospect of an imminent rate hike.
If policymakers appear minded to pursue a more aggressive pace of monetary tightening this could boost the US Dollar across the board.
However, as investors have already priced in a high likelihood of another increase in interest rates any upside potential for USD exchange rates could prove limited at this juncture.
Demand for the ‘Greenback’ could pick up ahead of the weekend, though, if June’s non-farm payrolls report indicates a further tightening of the domestic labour market.
Current EUR USD Interbank Exchange Rates
At the time of writing, the Euro US Dollar exchange rate was slumped around 1.1350. Meanwhile, the US Dollar Euro exchange rate was making gains in the region of 0.8807.