EUR/USD Exchange Rate Strengthens on ?Bullish? ECB Comments

January 11, 2018 - Written by Ben Hughes

STORY LINK EUR/USD Exchange Rate Strengthens on ?Bullish? ECB Comments

On Wednesday’s trading session, the Euro to US Dollar exchange rate saw a minimal rise.

The pairing opened daily trading in the region of 1.1930 and closed higher around 1.1956 in the evening.

Eurozone news was fairly limited, only consisting of a small development in German coalition talks.

The CDU/CSU union and SPD Party announced that they had reached an agreement on immigration laws, but there were still uncertainties about a successful conclusion to talks.

In the US, the main limiting factor was a speech by Federal Reserve official Neel Kashkari. While Kashkari won’t be voting on interest rate decisions this year, he still unsettled traders by stating that US interest rates should remain untouched.

Kashkari’s motivation was to allow US inflation rates and wage growth to push higher, but the sentiment concerned traders who are looking forward to three or possibly four interest rate hikes in 2018.

Euro to US Dollar Exchange Rate Rises on Signs of QE Wind Down

The Euro has been in high demand on Thursday afternoon, rising by 0.7% against the US Dollar and seeing greater gains against the Canadian Dollar and Japanese Yen.

The Euro didn’t get off to a strong start in daily trading, but has recently rallied thanks to European Central Bank (ECB) remarks.

At its monetary policy meeting, the ECB has suggested that it could start to taper off its quantitative easing (QE) program in the future.

QE is the ECB’s scheme to stimulate the Eurozone economy, which involves buying up bonds and assets from across the currency bloc.

The program was launched three years ago and since then, the ECB’s portfolio of assets has ballooned to the realm of trillions of Euros.

Now, economists believe the ECB could change its course because of a small adjustment in its usual post-meeting statement. The crucial passage was;

‘The language pertaining to various dimensions of the monetary policy stance and forward guidance could be revisited early in the coming year.

A remark was made that a gap appeared to be emerging between favourable economic conditions and a policy stance that remained in a crisis configuration’.

To translate, the ECB may begin to think about altering its bond buying program, given that economic conditions have improved since it started buying up bonds.

While the message has been vague and QE tapering by no means assured, traders have nonetheless bought up the Euro on this news, leading to a rally for the EUR/USD exchange rate among others.

Hinting at possible interest rate hikes in the future, the ECB’s notes also included the statement;

‘As progress was made toward a sustained adjustment in the path of inflation, the relative importance of the forward guidance on policy rates would increase’.

This also suggests a move away from excessive QE, as hinting at increasing policy rates (raising interest rates) is the first step towards actually performing this action.

US Dollar to Euro Exchange Rate Drops on Continued Fed Caution

Following the previous speech from Fed official Neel Kashkari, the US Dollar has been weakened again today by comments from Fed officials.

This has led to a US Dollar to Euro decline, with the USD also declining against peers like the Pound and New Zealand Dollar.

In a similar vein to Kashkari, Fed official Charles Evans has suggested leaving US interest rates untouched until inflation can properly pick up;

‘I’d feel a lot more confident if I saw those transitory reductions in the inflation rate go away.

If things are worked out we could resume a nice gradual pace (of rate hikes) at that point, and still get the funds rate up to its natural level before too long’.

Euro to US Dollar Slide Possible on Next Week’s Inflation Rate Stats

Looking ahead, the Euro could lose ground to the US Dollar on 17th January, when December’s Eurozone inflation rate figures come out.

For the basic, finalised year-on-year reading, expectations are a slowdown from 1.5% to 1.4%.

While minor on the face of it, such a result could devalue the Euro as it would be a move away from the European Central Bank’s (ECB) 2% inflation target.

Lower inflation reduces the pressure on the ECB to consider higher interest rates, so could mean that the Euro slides on trader disappointment.

US inflation figures will be out sooner, with December’s readings being announced on the afternoon of 12th January.

As with the Eurozone figures, expectations are for a decline in US inflation, so the US Dollar could close weekly trading down against the Euro.

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TAGS: Euro Forecasts