EUR to USD Exchange Rate Recovers to Week?s Opening Levels on ECB Hopes

July 7, 2017 - Written by David Woodsmith

STORY LINK EUR to USD Exchange Rate Recovers to Week?s Opening Levels on ECB Hopes

Increased speculation that the European Central Bank (ECB) could be edging towards normalising monetary policy has helped the Euro to US Dollar exchange rate to recover this week. The ‘Greenback’ has been held back by an unclear Federal Reserve policy outlook.

The outlook for EUR/USD remains strong. While the pair tumbled in the middle of the week and hit a low of 1.1319, it recovered on Thursday to around the week’s opening levels of 1.1425 again. The pair is still pretty close to last week’s one-year-high of 1.1442.

EUR Supported by European Central Bank (ECB) Speculation

The Euro continues to be influenced largely by European Central Bank (ECB) news this week, as strong Eurozone ecostats no longer surprise markets.

For investors, the biggest obstacle to further Euro demand is the ECB’s ultra-loose monetary policy. Until the ECB indicates it is ready to tighten monetary policy again, the Euro’s upside potential is limited.

That’s why investors bought the Euro following the publication of the ECB’s latest meeting minutes this week.

The ECB minutes were notable in that they had dropped long-standing comments mentioning the possibility of further expansion or extension of the ECB’s aggressive stimulus measures.

As the minutes no longer indicated the bank was prepared to extend the stimulus program, investors naturally assumed the stimulus program would be withdrawn by its projected end date.

This was seen as a notably hawkish shift in tone from the central bank, despite dovish comments from ECB officials over the past week that the Eurozone still needed the quantitative easing (QE) schemes.

This week’s Eurozone data has supported the shared currency as Eurozone PMIs from June have beaten expectations.

Friday saw the publication of Germany’s May industrial production stats, which improved to 1.2% month-on-month despite being forecast to only come in at 0.3%. France’s May trade deficit also lightened further than expected, bolstering new economic confidence in France.

USD Slips on Fed Timing Uncertainty

The US Dollar has been unable to hold its recovery this week as Federal Reserve officials have sent mixed signals about the bank’s plans to tighten monetary policy further.

In the Federal Open Market Committee’s (FOMC) latest meeting minutes, policymakers agreed to keep a close eye on US inflation, though most believed it would naturally recover in the coming months.

However, as a result policymakers appear undecided on how soon to start unwinding the Fed balance sheet and further normalising monetary policy.

This uncertainty in forward guidance has left some investors betting on further action in December, with others betting the Fed will leave monetary policy frozen now until next year. This has weighed on US Dollar demand.

While most traders are waiting for Friday’s Non-Farm Payroll results before moving further on the US Dollar, this week’s US data has been relatively unimpressive so far too.

May’s US trade deficit lightened slightly, but not as much as expected. ADP’s June employment change results also fell short of expectations, worsening concerns that the Non-Farm Payroll data could disappoint.

EUR/USD Forecast: US Inflation Stats Next Week

Euro to US Dollar investors will be reacting to Friday’s US Non-Farm Payroll results towards the end of Friday’s session. If wage growth stats impress, EUR/USD is likely to end the week below its opening levels as Fed rate hike bets increase.

Next week’s EUR/USD movement is likely to focus on developments on the European Central Bank (ECB) and Federal Reserve outlooks. Any comments from central bank officials throughout the week could influence the outlook and movement of the exchange rate.

The Eurozone’s economic calendar won’t be as busy next week. Germany’s May trade balance update will be published on Monday, followed later in the week by Eurozone industrial production and final June inflation stats for Germany and France.

As for the US Dollar, the biggest event next week will be June’s US inflation stats, due on Friday. If inflation beats expectations, Fed rate hike bets will jump and the US Dollar will see stronger demand towards the end of next week.

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TAGS: Euro Forecasts