Although the AUD EUR exchange rate had been boosted by strong Australian data those gains were later lost thanks to the diminished odds of the European Central Bank (ECB) engaging in further monetary loosening.
Markets were pleasantly surprised to find that the Australian Unemployment Rate had dipped from 5.8% to 5.7% in July, particularly as this came hot on the heels of the Reserve Bank of Australia’s (RBA) indication that the labour market is critical in its monetary policy considerations. Employment surged by 26,200 in the last month, suggesting that conditions within the domestic economy are tightening in spite of investors’ doubts. Although much of this growth came from an increase in part-time positions the result was nevertheless received positively, boosting the Australian Dollar Euro (AUD EUR) exchange rate on Thursday.
Risk appetite was also providing support to the ‘Aussie’, with the appeal of the commodity-correlated currency boosted by the softness of the US Dollar (USD). A bullish mood was prompted when the latest Federal Open Market Committee (FOMC) meeting minutes revealed a greater division amongst policymakers, sharply diminishing the odds of an interest rate hike coming before the end of the year.
After suffering from a lack of domestic data the Euro (EUR) struggled to capitalise on improved construction output for July, despite production recovering to rise from -0.4% to 0.6% on the year. While the impact of the Brexit vote on the Eurozone economy has appeared to be decidedly minimal investors continued to favour higher-yielding assets over the more muted single currency. The finalised Consumer Price Index for July offered no surprises, meanwhile, confirming that inflation within the currency union had picked up on the year.
Confidence in the Euro strengthened more substantially in response to the account of the European Central Bank’s (ECB) July monetary policy meeting. The ECB’s ‘wait and see’ mentality was confirmed by the account, encouraging speculation that the central bank will not shift from its neutral bias for some time to come. As the minutes noted:
‘It was widely agreed that the immediate policy focus should remain on implementing the comprehensive set of policy measures decided in early March and on preserving an appropriate degree of monetary accommodation in order to secure a return of inflation rates towards levels below, but close to, 2% without undue delay.’
Consequently, with the prospect of further monetary loosening diminished the AUD EUR exchange rate began to retreat.
The Euro may struggle to maintain its recent gains, however, if the latest German Producer Price Index points towards a weakening in inflationary pressure. As much of the Eurozone’s growth remains driven by the German economy any signs of weakness here are likely to provoke a bearish reaction. A stronger showing, on the other hand, would boost the appeal of the single currency and offer further evidence that the UK’s vote to leave the EU has not materially impacted its neighbours.
With no additional Australian data due for release this week the AUD EUR exchange rate will remain vulnerable to downside pressure from market risk sentiment.
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