EUR USD Exchange Rate Struggles to Hold Momentum Ahead of Eurozone Inflation

February 26, 2018 - Written by Ben Hughes

STORY LINK EUR USD Exchange Rate Struggles to Hold Momentum Ahead of Eurozone Inflation

The Euro US Dollar (EUR/USD) exchange rate recovered some of its lost ground at the start of the week, even as investors braced for the latest comments from European Central Bank (ECB) President Mario Draghi.

Although there was a risk that Draghi will opt to maintain a relatively dovish tone with regards to monetary policy this was not enough to keep the Euro under pressure this morning.

Investors were also encouraged by UBS Wealth Management’s decision to raise its growth forecasts for France.

With UBS now seeing the French economy growing by 2.3% in 2018, as opposed to its previous forecast of 1.8%, this naturally boosted confidence in the outlook of the Eurozone’s second largest economy.

This gave the Euro a fresh leg up against its rivals, even though the ECB still looks unlikely to adopt a materially hawkish outlook in the near future.

US Dollar Softens as Markets Await Fed Chair Powell Commentary

Demand for the US Dollar, meanwhile, eased on Monday morning as the general mood of global markets improved, diminishing safe-haven demand.

With markets having already priced in high odds of the Federal Reserve raising interest rates imminently the upside potential of the US Dollar has remained rather limited.

Comments from new Fed Chair Jerome Powell have the potential to trigger further USD exchange rate volatility in the coming days, with markets yet to assess his approach to monetary policy.

Even so, as Viraj Patel, research analyst at ING, commented:

‘We expect him to echo the tone of the recent minutes and cement expectations of three Fed rate hikes this year. It looks too early for any hints of extra tightening at this stage. US data should be mixed with durable goods orders a little softer, but manufacturing ISM quite strong. Overall, we think the Fed tightening cycle looks fairly priced now and doubt the dollar can gain much further benefit from positive Fed rhetoric.’

A widening of the advance goods trade deficit on Tuesday afternoon could offer additional support to the EUR/USD exchange rate, undermining confidence in the outlook of the US economy.

While even weak goods data is unlikely to be enough to deter policymakers from pursuing a faster pace of monetary tightening this could still weigh down the US Dollar in the near term.

On the other hand, any upside surprises could help to strengthen the case for up to four 2018 interest rate hikes, boosting USD exchange rates as a result.

EUR Exchange Rate Jitters Forecast on Eurozone Inflation Data

The release of February’s German and Eurozone consumer price index data is set to provoke further volatility for the EUR/USD exchange rate, meanwhile.

With forecasts pointing towards another dip in inflationary pressure on the year this could give investors fresh incentive to sell out of the Euro.

However, as analysts at BBH noted:

‘The core rate may have held steady at 1.0%. While not targeted, this rate has assumed greater significance under Draghi than his predecessor Trichet. The market will be sensitive to any surprise, thinking that it will impact the debate between the doves and hawks since it is the last CPI report before the early March ECB meeting.’

If there are any signs that inflationary pressure within the currency union is building the downside potential of EUR exchange rates is likely to be somewhat limited.

Should inflation prove weaker than forecast, though, this could weigh heavily on the appeal of the single currency.

ECB policymakers are likely to maintain a more cautious outlook for longer unless there is an indication that inflation is making a sustained push higher.

With the Eurozone unemployment rate forecast to have dropped from 8.7% to 8.6% in January the EUR/USD exchange rate could find a fresh rallying point.

Evidence that the domestic economy is continuing to strengthen is likely to encourage policymakers to take a more hawkish view, even if inflation fails to show significant progress towards the ECB’s 2% target.

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TAGS: Euro Forecasts