EUR USD Exchange Rate Trends Higher as ECB Releases Positive 2018 Forecast

December 28, 2017 - Written by James Fuller

STORY LINK EUR USD Exchange Rate Trends Higher as ECB Releases Positive 2018 Forecast

A poor run of US data helped the Euro US Dollar exchange rate to make strong gains on Thursday, with the world’s largest economy showing some signs of weakness.

Another disappointing set of jobless claims figures undermined confidence in the robustness of the US labour market, giving investors fresh incentive to sell out of the US Dollar.

Coupled with an unexpected widening of the advance goods trade deficit for November this left the EUR USD exchange rate on a bullish run, especially as markets remain jittery over the Trump administration’s tax reforms.

The mood towards the single currency, meanwhile, improved on the back of the European Central Bank’s (ECB) latest Economic Bulletin.

Optimistic 2018 ECB Forecasts Boost EUR USD Exchange Rate

ECB policymakers struck a largely positive tone in the December Bulletin, forecasting another strong year of Eurozone growth for 2018.

Naturally this enhanced the appeal of the Euro, even though the odds of any return to a monetary tightening bias remain distinctly limited.

So long as the Eurozone economy remains in a robust state of health over the coming months this should encourage greater confidence amongst consumers and businesses alike.

Even so, the key focus for the ECB remains inflation, leaving the EUR USD exchange rate vulnerable to the downside if tomorrow’s German consumer price index data fails to impress.

Unless inflationary pressure shows fresh signs of picking up the mood towards the Euro is likely to sour significantly, reversing the recent gains of EUR exchange rates.

Looking further ahead, the single currency could still be exposed to political risks in 2018.

Worries over the political situation in Italy are likely to mount heading into January, keeping the EUR USD exchange rate under some degree of pressure.

However, as analysts at TDS noted:

‘Q1 2018 could see some renewed uncertainty in the periphery, widening credit spreads. However, we note that election risks in Italy are not binary as in the case of the French election. The newly-approved electoral law has made the risk of the Eurosceptic party forming a government less likely. However, a prolonged period of uncertainty could keep peripheral spreads on edge.’

Jitters are also expected as Greece prepares to exit its current bailout plan in August, with many Greeks having expressed scepticism over the likelihood of a ‘clean exit’ from the program.

US Dollar Demand Forecast to Remain Muted as US Data Disappoints

Demand for the US Dollar is unlikely to recover significantly in the near term, even after the Chicago PMI surged to a more than six-year high in November.

Speculation over the policy outlook of the Federal Reserve could provoke some USD volatility, though, as markets assess the likely pace of monetary tightening in 2018.

There are still some concerns that the Fed will not continue to raise interest rates at the pace investors would like, especially as the composition of the Federal Open Market Committee (FOMC) is set to change significantly.

Even so, Marc Chandler, Global Head of Currency Strategy at BBH, commented:

‘By the end of 2018, the Federal Reserve will look quite a bit different. There will be a new president of the New York Federal Reserve, the only regional president who is also a permanent voter on the FOMC. We expect the Federal Reserve under Powell to remain on the current path. Powell’s leadership will be tested at the end of the monetary tightening cycle, but that is likely to be some time off. We have been anticipating the real Fed funds rate to peak near zero, which we surmise is close to 2.00%-2.25%.

‘Still, we expect greater continuity at the Federal Reserve than the number of personnel changes might suggest. The new chair seems committed to the course that the Fed is presently on: gradual rate hikes and a pre-set reduction of the Fed’s balance sheet.’

Either way, if US domestic data continues to disappoint this could keep the appeal of the US Dollar generally muted.

Unless the US economy demonstrates greater signs of resilience in the latest ISM manufacturing and non-manufacturing indexes then the EUR USD exchange rate could extend its gains further in the coming week.

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TAGS: Euro Forecasts