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USD EUR Exchange Rate Strengthens as ECB Source Dismiss Early Taper Suggestions

January 16, 2018 - Written by John Cameron

The US Dollar Euro (USD EUR) exchange rate is trending higher today as sources European Central Bank (ECB) put a dampener on tapering talk.

Euro (EUR) Takes Pause on Suggestions ECB Remains Committed to QE

The Euro’s recent advance came to an abrupt halt this morning following reports that the ECB is unlikely to announce any further tapering of its quantitative easing programme at next week’s policy meeting.

Speculation has been rife in recent days over the possibility of the ECB revising its policy plans in ‘early’ 2018, particularly in regards to its commitment to its bond-buying programme.

Many investors interpreted this as a signal that the ECB may seek to speed up the winding down of its bond purchases in the coming months.

This in turn led to speculation that the bank could even implement a rate hike in late 2018, driving USD/EUR to a new three-year low.

However Reuters reports that sources close to the ECB’s policy-making Governing Council dismissed this, with any update to its QE programme unlikely to at least March when the bank will receive its updated economic forecasts, giving policy makers a clearer idea of how the economy is faring.

One of the source suggested; ‘We need more thorough analysis before making any change.’ While also added that ‘the market reaction to the minutes was excessive.’

US Dollar (USD) Rallies but Underlying Weakness Remains

The US Dollar appears to have broken a four day run of losses against the Euro today as it trends higher as US traders return after a long weekend.

The rally appears to be largely on the back of central bank speculation, as the diminished chances of an ECB rate hike prompts investors to turn their attention back to the Federal Reserve.

Some analysts suggest that markets have been downplaying the Federal Reserve’s plans to raise hikes up to three times in 2018 in the face of recent ECB speculation.

John Higgins, chief markets economist at Capital Economics, said in a note on Monday;

‘We expect the dollar to stage a modest rebound against most other developed market currencies this year, as the contrast in the monetary policies of the Fed and other major central banks generally proves to be a bit starker than investors are anticipating.’

‘Our long-standing view [is] that the Fed will be a bit more hawkish in 2018 than the markets seem to be envisaging, while the ECB and the BoJ keep their policy rates on hold.’

However more broadly the US Dollar remains under pressure this morning, with the dollar index down 0.3%, with the underlying weakness of USD leaving it vulnerable to any upswing in the Euro.

Part of the reason for this the recent weakness in the US Dollar appears to be driven by concerns over a potential US government shut down in Washington later this week, but also due to some of the wider political uncertainty the surrounds the Trump administration.

Boris Schlossberg, managing director of foreign exchange strategy at BK Asset Management said;

‘The weakness in the buck suggests that the move is political as well as economic as global investors grow increasingly concerned about the chaos in Washington DC. After the rancor of the past few days, the risk of the government shutdown has increased and that factor could be weighing on the dollar as well’

USD EUR Forecast:

Looking ahead the USD EUR exchange rate may continue to rally tomorrow as the US publishes its latest Manufacturing Production figures.

Economists forecast that the data will show that factory output climbed at the end of 2018, with production growth predicted to rise from 0.2% to 0.4%.

Meanwhile the Eurozone will release December’s final inflation reading for the Eurozone tomorrow, which may prompt a dip in the Euro as it is expected to confirm that inflation dip from 1.5% to 1.4%, moving it further away from the ECB’s target rate of 2%.

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