Euro US Dollar (GBP/USD) Exchange Rate Spikes as Risk Sentiment Improves

July 25, 2022 - Written by John Cameron

STORY LINK Euro US Dollar (GBP/USD) Exchange Rate Spikes as Risk Sentiment Improves

EUR/USD Exchange Rate Firms on Risk Sentiment Turnaround

The Euro US Dollar (EUR/USD) exchange rate trended on Monday morning, as positive risk flows buoy the Euro (EUR) in spite of downbeat data from the Ifo institute. Meanwhile, the US Dollar (USD) is succumbing to downside ahead of this afternoon’s data releases.

At the time of writing, EUR/USD is trading at $1.0220, slightly above today’s opening levels.

Euro (EUR) Recovers Following Dismal Ifo Data

The Euro is trading in a mixed range so far, as weaker-than-expected German data dents the single currency against some of its peers. Against the US Dollar, however, Euro upside is complemented by downside in the ‘Greenback’.

Germany’s Ifo data revealed this morning that the country’s business climate fell to 88.6 in July rather than dipping by a smaller amount, to the 90.2 expected. This is the worst reading since June 2020 during the first Covid-19 lockdowns, when the global economy fell into recession.

Companies fear that business will significantly worsen in the coming months, as Ifo President Clemens Fuest remarks:

‘Germany is on the brink of a recession: high energy prices and the threat of gas shortages are weighing on the economy.’

The fact that gas flows resumed from Russia last week at a significantly reduced capacity is considered to be denting business morale, with pessimism widespread across the manufacturing, services, retail and construction industries.

Furthermore, analysts at ING bank comment:

‘Currently, in the base case scenario with continuing supply chain frictions, uncertainty and high energy and commodity prices as a result of the ongoing war in Ukraine, the German economy will be pushed into a technical recession.’

Nevertheless, some upside is restored by both a recovery in risk appetite and upbeat comments from the European Central Bank (ECB).

ECB policymaker Martins Kazaks told Bloomberg that a further ‘quite significant’ increase in interest rates may be needed in September, in addition to the 50-basis point rise agreed at July’s meeting.

Asked whether a larger move of 75bps may be on the table, Kazaks did not confirm the bank’s position, but asked officials to ‘keep an open mind’.

US Dollar (USD) Weakens on Risk-On Mood

The US Dollar is tumbling against its peers on Monday as a risk-on market mood weakens support for the safe-haven currency.

Ahead of this afternoon’s data – and more broadly, the Federal Reserve’s interest rate decision later in the week – USD investors may be hesitant to place bullish bets. While the Chicago Fed’s national activity index is expected to show an improvement in June, the Dallas Fed’s manufacturing index is forecast to decline further.

Last month, the Federal Reserve Bank of Dallas' general business activity index for manufacturing in Texas weakened across manufacturing conditions, new orders and future expectations, possibly on account of high inflation and limited consumer spending power.

This week, USD sentiment appears mixed – inflationary pressures remain although the Federal Reserve are hesitant to hike interest rates by a full percentage point, like the Bank of Canada (BoC), as this may put the economy at risk of a recession.

Consequently, the probability of a 75bps rate hike on Wednesday is now close to 80% while a full point raise is less likely at just above 21%.

Geopolitical tensions continue to lend the US Dollar steady support as the war rages on in Ukraine and Brexit chaos is illustrated by newsworthy queues at the Dover-to-Calais boarding point.

Over the weekend, holidaymakers faced queues of up to 11 hours at the Dover ferry crossing, as British foreign minister Liz Truss blaming the French for shortages of passport control staff: in a retaliatory tweet, French transport minister, Clément Beaune said:

‘The French authorities are mobilised to control our borders and facilitate the traffic as much as possible. I discussed this constructively with my counterpart [Grant Shapps]. But France is not responsible for Brexit.’

EUR/USD Exchange Rate Forecast: US Data to Inform Next Moves?

Looking ahead, the Euro US Dollar exchange rate is likely to trade this afternoon on America’s activity indexes, given a lack of EU economic data.

If the US releases print as expected, the ‘Greenback’ could trade in a mixed range: a decline in manufacturing activity suggests a weakening economy, which gives the Fed further reason to be cautious in orchestrating this week’s interest rate hike.

However, if the data prints above expectations, USD is likely to receive a boost, pressuring EUR/USD. Furthermore, another turnaround in risk sentiment would lend safe-haven support to the US Dollar, further weakening the Euro-led exchange rate.

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