More Downside for the Euro to Dollar Exchange Rate?
The EUR to USD outlook has changed from bullish to bearish for the euro, after it gained 20 points. The euro rose slightly on Friday against the dollar, but the greenback, which fell after recent U.S. employment data was less optimistic than expected, has shown its strength. The EUR to USD exchange rate has settled around the $1.14 mark. The employment data may have an effect in the short-term. Currency traders should not be rushing to pull any transaction levers just yet.
Indeed, the U.S. Department of Labor reported significantly lower job creation than last month. The employment figures were one of the last chances to prompt the Federal Reserve to raise rates at its next meeting in June. Now, it looks like bad news for the dollar, as this will only reduce the already lukewarm chances that the Fed will raise rates. It did so in December for the first and only time since 2006.
Indeed, the dollar has maintained considerable strength against the euro. The U.S. currency recovered promptly to the trading levels seen before the release of the employment data. Traders, it seems, feel that the key consideration from the employment report is that, slowly or quickly, what is important is for the U.S. economy to continue creating jobs. To that effect, the Fed might find next week’s retail sales data more important in deciding its interest rate course. (Source: “EUR/USD – Euro under Pressure, US Nonfarm Payrolls Next,” Market Pulse, May 6, 2016.)
The strengthening of the dollar this week has ended the bearish trend from the past few weeks. The dollar had lost some seven percent against a basket of major foreign currencies starting last January. Predictably, the weak dollar coincided with a gradual increase in oil prices. Now, the strong dollar might reverse that course, since it makes commodities more expensive for buyers using other currencies.
The Fed, for its part, has upheld a consistent message. It will only raise rates when the country’s economic performance allows for it. This means that nobody can preclude a hike at the June meeting quite yet. Until now, the markets seemed unwilling to believe it, but the reaction to the employment figures suggests a reversal.
It’s important for markets to start adjusting early and gradually to the possibility of another rate hike. If the situation in June favors a hike, catching a sleepy market off guard, it could create a major international market crash. Conversely, if the Fed doesn’t communicate its rate hike intentions clearly enough, it could lead the dollar to gain too much against the euro, which would also cause a crash. (Source: “Fed expected to stand pat, but communications important for the USD – Commerzbank,” FXStreet, April 25, 2016.)