Euro slumps to fresh lows after strong US manufacturing data

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4 January 2017

Written by
Matthew Ryan

Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

The Euro fell to a fresh 14 year low against the US Dollar on Tuesday, which showed broad strength against its major peers during early afternoon trading following the release of an impressive manufacturing PMI.

T
he heavily scrutinised manufacturing index surged above forecast to a two year high 54.7 in December from a previous 53.2, buoyed by the largest increase in new orders in more than seven years. This impressive showing sent the US Dollar index to its strongest position since December 2002. Investors have continued to pile into the US Dollar in the past few weeks as they prepare for life with Donald Trump as President of the United States and the prospect of multiple interest rate hikes by the Federal Reserve in the coming quarters.

Earlier, the UK’s own business sentiment manufacturing PMI surged well above expectations, although provided little help for Sterling. The UK’s manufacturing sector ended the year on a high note, with the index jumping to a 20 month high 56.1 in December from the 53.6 recorded in November, comfortably above the level of 50 that denotes expansion. The weaker Pound since the Brexit vote has helped boost demand from abroad and should provide strong momentum for the sector in the first few months of 2017.

Currency markets will turn their attention to the Federal Reserve’s meeting minutes today. Investors will be looking for additional clues as to the likelihood of further interest rate hikes by the central bank this year after the Fed raised rates for only the second time since the financial crisis in December.

In the meantime, Eurozone inflation data this morning is expected to show core prices grew by a much improved 1.0% last month, which would ease pressure on the European Central Bank in its quest to boost inflation in the Euro-area.

Major currencies in detail

GBP

The Pound fell against the US Dollar despite a brief recovery late on in the session to end the day 0.4% lower against the greenback.

Investors paid little attention to yesterday’s very impressive manufacturing PMI, possibly due to its relatively minor impact the sector has on overall GDP. The key driver for the Pound in the coming months will also undoubtedly be how much risk the Brexit process poses to the UK, rather than the country’s economic performance.

The monthly construction PMI for December will be the main economic release in the UK today. Consensus is for a modest improvement although, as with yesterday’s manufacturing data, a significant reaction in Sterling is unlikely bearing a sizable surprise.

EUR

Despite falling sharply to its lowest level in 14 years, the Euro recovered as the day progressed on Monday to end the session 0.1% higher against the US Dollar.

German inflation data released yesterday boded well for today’s Euro-wide release, beating expectations across the board. Consumer prices increased 0.7% in the month to December and by a fairly significant 1.7% on a year previous, its fastest pace since 2013. The sharp improvement was largely driven by an increase in oil prices, which saw global oil surge back above $50 a barrel in December on the back of an OPEC production cut deal.

Prior to this morning’s important inflation numbers, Markit will be releasing its services PMI for the Eurozone, which is expected to remain unchanged for December.

USD

The US Dollar index rose 0.1% on Monday following decent support from an impressive manufacturing PMI.

In tandem to yesterday’s strong manufacturing data, construction spending in the US also surprised to the upside. Spending rose 0.9% in the month to November, beating expectations for a 0.6% increase.

The FOMC’s meeting minutes this evening will be one of the main announcements in the currency markets this week ahead of Friday’s nonfarm payrolls number. We see potential for further strength in the US Dollar should the minutes continue to suggest the central bank remains on course to hike interest rates at least three times in the US in 2017.

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