Euro Continues To Slide against the US Dollar, Bet For an ECB Rate Cut Increase
On Tuesday, the Euro continued its slide, this time declining below the lowest value in June. Notably, the common currency hit $1.1206 while the US dollar held strong in its upward trajectory.
Re-assessing expectations of a rate cut
Before the non-farm payroll data, investors were betting on a deep rate cut by the US Fed. To be sure, the greenback was under enough pressure to warrant such an action by the US Central bank. Investors were expecting a rate tightening by the Fed by 50 basis points. In fact, 25% of traders were sure of a rate cut chance by the said magnitude.
But the chance evaporate soon after the non-farm payroll data was outed. As per the data, job growth was strong in June compared to the last two months. There were 224,000 jobs created in June compared to 160,000 which experts had anticipated the US Department of Labor to report. Notably, this is the highest job growth in five months.
Later on Wednesday, the Fed Chairman Jerome Powell will appear before Congress for testimony. Investors are counting on the tone which he will strike to get a clearer sense of where the greenback could be headed next.
If the Fed Chair comes across as hawkish or neutral, the dollar is bound is continuing gaining against rivals. Basically, this would indicate that if there has to be a rate cut, it will be quite limited.
The growth impetus is pushing the US dollar index to newer heights every waking day. On Tuesday, the DXY added 0.1% to settle at 97.488.
Soft growth in the EU, weak fundamentals
The rebounding dollar has seen bets against major rivals grow. On Friday, July 5, the common currency slid 0.1% to settle at $1.1273. The currency ended the week with a 0.8% weekly loss relative to the greenback.
On Tuesday, the Euro extended its decline to $1.1206 which put it at the lowest level in three weeks against the US dollar.
There is increased selling pressure on the EUR as investors’ bets for a chance for rate easing grow. This possibility is strengthened by the fact the nominated Chair of the ECB, Christine Lagarde, appears to be dovish.
Further, the accommodative stance adopted by the ECB is on the back of weak fundamentals within the EU. The weak growth has affected the economic sentiment within the EU and the Euro area markedly.
The economic sentiment survey for June 2019 in the EU was crucial in helping investors price the EUR. Notably, the Economic Sentiment Indicator (ESI) was markedly lower than the previous month at 103.3. This implies a decline of about 1.9 points.
To add salt to an already festering wound, there are fears of a recession in Germany, EU’s economic powerhouse. At the core of the fears is the stubbornly weak manufacturing data coupled with tensions in global trade.
The most worrying trend is the fall in foreign orders for German goods, considering that the economy is export-driven. Latest figures show that there was a 2.2% month on month drop in manufacturing orders in May. Compared to the same month last year, the drop is a whopping 8.6%.