After Chinese growth sank to its lowest level in twenty-five years on Tuesday the Australian Dollar to Euro (AUD/EUR) exchange rate has been making strong gains, with risk appetite boosted by hopes of new economic stimulus.
As global stock markets took on a slightly calmer tone at the start of the week the ‘Aussie’ (AUD) returned to an uptrend as traders were encouraged to buy back into the softened antipodean currency. Australian TD Securities Inflation also showed a healthy uptick on the year in December to clock in at 2.0%, up from 1.8%, offering another indication that the health of the domestic economy is stronger than might have been thought.
Lacking the support of further safe-haven demand the Euro (EUR) weakened during Monday’s European session, with investors becoming more cautious ahead of this week’s European Central Bank (ECB) policy meeting. Although expectations suggest that the ECB will not expand its quantitative easing measures at this juncture policymakers are likely to maintain a more dovish outlook, particularly after Eurozone inflation was confirmed to have remained weak at 0.2% in December.
Though it came as no surprise that China’s GDP had slowed to its lowest level in twenty-five years at the end of 2015 the market reaction to this news was not as bearish as anticipated. Pundits had largely been braced for this result, and as this latest figure boosted hopes that further economic stimulus could be in the pipeline risk appetite widely increased in response. Commodity prices generally improved in an unusual show of optimism, in spite of Chinese Industrial Production having weakened further than forecast on the year in December.
The appeal of the Euro was dented further following the disappointing Eurozone Consumer Price Index report as the German ZEW Economic Sentiment Survey revealed that confidence within the currency union’s powerhouse economy had declined in January.
Some of the Australian Dollar’s bullishness may wear off over the coming days, however, if the Westpac Consumer Confidence Index shows that sentiment within the nation has remained weaker. Should markets return to a state of risk aversion the AUD/EUR exchange rate is also likely to trend lower, particularly if the latest US Consumer Price Index puts more pressure on the Federal Open Market Committee (FOMC) to hike interest rates again sooner rather than later.
Demand for the single currency, however, can be expected to remain generally softer ahead of Thursday’s ECB policy meeting. Any suggestions of more monetary loosening could drag the Euro down, although policymakers’ inability to act may yet prompt a fresh round of strength for the common currency.
At the time of writing, the Australian Dollar to Euro (AUD/EUR) exchange rate was making gains at 0.6355, while the Euro to Australian Dollar (EUR/AUD) pairing was slumped around 1.5730.
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