AUD/EUR Exchange Rate Weaker after RBA Holds the Door for Rate Cuts

Euros (EUR)

Investors remained uninclined to favour the Australian Dollar after comments from Reserve Bank of Australia (RBA) Governor Glenn Stevens, while the Euro rallied ahead of the latest Eurogroup meeting.

Euro (EUR) Strengthened on Hopes of Imminent Greek Bailout Agreement

At the start of the week the Euro (EUR) was shored up by relief that the Greek parliament had approved its latest raft of creditor-mandated austerity measures. There had been concerns that Prime Minister Alexis Tsipras’ narrow majority might not be enough to carry the bill, which would have had negative implications for the chances of the Hellenic nation receiving its next tranche of bailout funds sooner rather than later. However, while concerns over the future of the Greek economy were temporarily eased, the single currency soon weakened.

Despite stronger-than-expected German PMIs suggesting an improvement in domestic conditions, the Eurozone Composite PMI was found to have fallen to a sixteen-month low of 52.9. While this remained within expansion territory, investors were nevertheless increasingly concerned that additional signs of weakness within the economy could prompt further easing from the European Central Bank (ECB).

Confidence in the Australian Dollar (AUD), meanwhile, was dented by more hawkish commentary from members of the Federal Open Market Committee (FOMC). The Presidents of the San Francisco and St Louis Federal Reserves indicated a belief that interest rates could be raised two or three times before the end of the year. While some doubts remained over the likelihood of a June hike, this nevertheless saw a sharp decline in risk appetite, weakening the ‘Aussie’.

RBA Commentary Failed to Shore up AUD/EUR Exchange Rate

A speech from Reserve Bank of Australia (RBA) Governor Glenn Stevens did little to offer support to the antipodean currency on Tuesday, with markets inclined to react bearishly. Stevens reiterated a commitment to the central bank’s inflation target, in spite of suggestions that it is no longer entirely reasonable in the current economic climate. This was seen to hold the door open for further monetary loosening in the near future, prompting the Australian Dollar to Euro (AUD/EUR) exchange rate to dip to a fresh four-month low of 0.6393.

Worries over the outlook of the RBA are likely to weigh on the ‘Aussie’ for some time to come, as Jane Foley, research analyst at Rabobank, noted:

‘We see the low level of wage inflation as a constraint on domestic demand going forward and, given our fears that growth in China could slow, we expect the RBA to keep pushing the AUD lower with policy signals.’

Demand for the Euro remained stronger in spite of a disappointing ZEW Economic Sentiment Survey, which suggested that confidence within the Eurozone was weakening markedly. Investors remained encouraged by hopes that the Eurogroup would agree to the disbursement of the latest Greek bailout funds at their latest meeting. The appeal of the single currency was also bolstered by a robust German GDP report.

AUD/EUR Exchange Rate Forecast: Weaker German Sentiment Could Soften Euro

Later this morning the first quarter Construction Work Done report could offer a rallying point for the Australian Dollar, with expectations pointing towards a modest improvement from -3.6% to -1.5%. Should demand prove weaker, however, persistent worries over the current health of the Australian economy are likely to keep the antipodean currency on a weaker footing.

The Euro could soften if tensions between creditors continue to overshadow the future of the Greek bailout program, as the International Monetary Fund’s (IMF) suggestion of ‘upfront and unconditional’ debt relief was met with some displeasure. Weaker German IFO Business Sentiment or GfK Consumer Confidence surveys could also diminish the appeal of the single currency on Wednesday.

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