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The Euro to Dollar Rate Drops Below 1.20 Handle as Fresh Signs of ECB Dovishness Weigh Heavily on EUR

September 11, 2017 - Written by Frank Davies

The euro to dollar exchange rate has fallen below the 1.20 handle during the European session, quoted at 1.19955 on Monday, September 11.

As the latest round of commentary from European Central Bank (ECB) policymakers proved rather dovish in nature this kept the EUR/USD on a weaker footing at the start of the week.

Investors were not encouraged as various ECB policymakers adopted a more cautious tone on the subject of monetary policy, suggesting that the central bank is still in no hurry to alter its outlook.

Executive Board member Benoît Cœuré warned that the relative strength of the Euro risks holding back inflation, giving the central bank reason to leave policy loose for some time to come.

This raises the risks of the quantitative easing program not being tapered as rapidly as markets currently hope, increasing the downside potential of EUR exchange rates.

Furthermore, analysts at Bank of America Merrill Lynch commented:

‘The strength of the Euro this year makes us even more confident that the ECB will take all the time it has with QE. It is inevitable in our view that the ECB will have to revise its inflation projection downwards again in September, further away from its target, to a large extent because of the strong Euro.

‘Moreover, we would expect strong forward guidance that policy rate hikes above zero will be on the table only after inflation is close enough to the target.’

Although the wider sense of market risk appetite picked up on Monday morning, thanks to a lack of escalation in North Korean tensions over the weekend, this failed to particularly weigh on the US Dollar.

With the damage from Hurricane Irma thought to be less severe than initially estimated investors were encouraged to take a more optimistic view of the US economy, helping to shore up the ‘Greenback’.

Lower Odds of December Fed Rate Hike Limit US Dollar Strength

However, in the wake of recent comments from Federal Reserve policymakers the upside potential of the US Dollar is still somewhat limited.

With policymakers adopting a more muted tone the Fed is looking rather less inclined to raise interest rates for a third time in 2017, as analysts at ING noted:

‘Add to this ongoing US political uncertainty – where the temporary debt ceiling extension has merely kicked the can down the road into early 2018 – and we fear that markets could still shift to the idea that any “pause” in the Fed’s tightening cycle will be fairly lengthy (if not permanent). Another set of disappointing US data releases, while not our base case, would deliver final nail in the coffin for a Dec Fed rate hike.’

Even so, if US data proves positive over the course of the coming week this could offer some greater measure of support to the ‘Greenback’.

Of particular interest will be Thursday’s consumer price index report, which is forecast to show a modest uptick on the year in August.

While this is not the Fed’s preferred measure of inflation a strong showing here could still improve the case for another imminent interest rate hike.

On the other hand, if inflationary pressure fails to show any fresh signs of strengthening this could offer the EUR USD exchange rate a rallying point.

Stronger Eurozone Production May Boost EUR Rates

Markets may struggle to find particular cause for confidence in the Euro this week, with fresh Eurozone data somewhat thin on the ground.

Even so, Wednesday’s Eurozone industrial production figures could provoke volatility for the EUR USD exchange rate.

As long as signs continue to point towards a greater level of resilience within the currency union’s economy this could boost the likelihood of the ECB returning to a more hawkish outlook in the near future.

If industrial output is shown to have dipped, however, this could add to the bearish mood of the Euro and extend its losses further.

While no change is expected from the finalised German consumer price index data this could still offer the EUR USD exchange rate a boost.

However, if ECB policymakers continue to express dovish sentiments the single currency is likely to remain largely biased to the downside.
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