The EUR/USD currency pair continues to face significant selling pressure, maintaining a negative trend for the fifth consecutive day during the Asian session on Thursday. At present, the pair is trading around the 1.0863 mark, reflecting a 0.14% loss on the day.
Wednesday’s data release revealed that the preliminary Eurozone Gross Domestic Product (GDP) for the second quarter met expectations, registering at 0.3% QoQ and 0.6% YoY. Additionally, the Eurozone’s Industrial Production for June MoM showed improvement at 0.5%, contrasting with the market consensus of -0.1% and a prior figure of 0.0%. Notably, earlier this week, the Eurozone ZEW Survey Economic Sentiment for August was reported at -5.5, a more favourable figure than the estimated -12 and previous reading of -12.2. This trend was mirrored in Germany, where the ZEW Survey Economic Sentiment for August showed an improvement to -12.3, compared with an expected -14.4 and a prior -14.7. Despite these stronger-than-anticipated data releases from the Eurozone, the Euro remains subdued against its rivals, reflecting persistent uncertainties regarding the region’s economic growth and inflation outlook.
A key factor contributing to the current strength of the US Dollar (USD) is the buoyant US economic data and the Federal Reserve’s (Fed) potential tightening cycle. US Industrial Production saw a significant uptick of 1.0% in July, greatly exceeding market expectations of 0.3% and reversing the prior decrease of 0.8%. The Housing Starts and Building Permits reports for July also surpassed market expectations and previous readings. In light of these data, the EUR/USD pair is facing headwinds as the Euro continues to weaken against the resurgent US Dollar.
The recent Federal Open Market Committee (FOMC) Minutes underscored that inflation in the US remains uncomfortably high. Fed officials have noted significant inflationary risks and indicated that additional monetary policy tightening may be necessary to steer inflation towards the longer-term target. Fed officials also conveyed that future rate decisions would be closely tied to incoming data and that a more cautious stance would be adopted in the coming months.
Looking ahead, market participants will be closely monitoring the US weekly Initial Jobless Claims and the Philadelphia Fed Manufacturing Survey for August, scheduled for release later in the day. On the Eurozone agenda, key data releases for the remainder of the week include the Eurozone Trade Balance, a speech by European Central Bank (ECB) Executive Board Member Philip Lane, and the monthly Harmonized Index of Consumer Prices (HICP) for July.
South African Relevance
For South Africa, a major trading partner with both the Eurozone and the United States, the EUR/USD pair’s movements are consequential. A stronger USD, coupled with potential US interest rate hikes, may exert pressure on emerging market currencies, including the South African Rand (ZAR). This scenario could lead to increased import costs for South Africa and might potentially contribute to domestic inflationary pressures. Conversely, a weaker Euro might make South African goods more competitive in the European market, potentially boosting exports to one of South Africa’s key trading partners. Furthermore, global central bank policies, particularly those of the Fed and ECB, are closely watched by the South African Reserve Bank, as they can inform and influence local monetary policy decisions.