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Euro US Dollar Exchange Rate Rallies Despite Weak Dark German Business Outlook

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The Euro (EUR) strengthened significantly against the US Dollar (USD) on Tuesday despite the economic outlook for the Eurozone darkening.

At the time of writing, the EUR/USD exchange rate was trading at around US$0.9962, which was a leap of roughly 0.8% from Tuesday’s opening rates.

Euro (EUR) Exchange Rates Bouyant despite Poor German Business Outlook

The Euro (EUR) has seen gains throughout Tuesday’s session, as investors opt to dismiss the Ifo’s German Business Climate Index.

A risk-on market mood served to sweep the concerns about Europe’s largest economy under the rug. While the ifo index did come in above forecast, the overall result saw German business confidence hit a 29 month low.

The index showed that German companies have very pessimistic expectations for the rest of the year, but believed that their current circumstances were better than expected.

Further detail came from the President of the ifo Institute, Clemens Fuest. He stated: ‘In trade, the index rose thanks to slightly better assessments of the current situation. Expectations remain markedly bleak, however, especially in retail. The index in construction declined once more. Assessments of the current business situation fell to their lowest level since January 2016. Expectations continued to deteriorate and order backlogs decreased.’

This pessimism came alongside growing expectations of a recession over winter. With the economic outlook in Germany looking ever bleaker, the same can be applied to the Eurozone as a whole.

US Dollar (USD) Exchange Rates Crumble as Fed Expected to Slow Rate Hikes

bannerThe US Dollar (USD) saw tumbles across the board on Tuesday as investors anticipated a slowdown in the Federal Reserve’s rate hike initiative.

USD investors pulled away from the safe-haven currency following Monday’s flash PMI readings. Both manufacturing and service sectors saw a contraction beyond market expectations.

Specifically, the service PMI showed the second-fastest fall in business activity for nearly two and a half years. As such, the data releases painted a dour picture for the US economy.

This picture was then reflected back towards the Fed’s rate hike initiative, which investors and analysts believed were contributing to a softening economy.

This aligned with comments on Friday from San Francisco Federal Reserve President Mary Daly. She stated: ‘We might find ourselves, and the markets have certainly priced this in, with another 75 basis-point increase, but I would really recommend people don’t take that away as, it’s 75 forever. I hear a lot of concern right now that we are just going to go for broke. But that’s actually not how we, I think about policy at all. We have to make sure we are doing everything in our power not to overtighten, and we can’t pull up too fast, and say we are done.’

Compounding the anxiety over the future of the US economy was a market shift to a risk-on disposition. With stability seeming to return to UK politics, investors favored the Pound (GBP) and more risk-sensitive currencies over the safe-haven ‘Greenback’ throughout Tuesday’s session.

Pound US Dollar Exchange Rate Forecast: US Economy to Return to Growth?

USD could see a boost on Thursday with the release of the latest GDP data. The release is forecast to show Q3’s GDP to increase from -0.6% to 2.4%, which would indicate that the US economy is returning to growth.

This may strengthen the ‘Greenback’ because the safe-haven currency will be a safe bet during trying economic times ahead.

Similarly, Thursday will bring the release of the European Central Bank’s (ECB) interest rate decision. While markets have already priced in a 75bps increase, any further hawkish comments from ECB policymakers could further buoy the Euro.