EUR/USD Exchange Rate Update: Lower ZEW Confidence Scores Drag Euro Down

March 20, 2018 - Written by David Woodsmith

STORY LINK EUR/USD Exchange Rate Update: Lower ZEW Confidence Scores Drag Euro Down

During Monday’s trading session, the Euro to US Dollar exchange rate rose from an initial opening level of 1.2276 in the morning to trade higher around 1.2337 by the evening.

Eurozone news on Monday was mixed – while the trade surplus for January shrank significantly, levels of construction output were reported higher than expected.

EUR/USD Exchange Rate Losses Triggered by Falling Confidence Scores

The Euro has lost ground to a strong US Dollar today, falling by -0.6% in the EUR/USD pairing.

The latest losses for the single currency have been caused by a negative reaction to ZEW economic sentiment indexes for March.

Levels of optimism in both the Eurozone and Germany have fallen; these results were especially bad because they showed greater-than-expected losses.

A Eurozone consumer confidence flash for March has been similarly unsupportive of the single currency, having remained flat at 0.1 points for the estimate.

USD/EUR Exchange Rate Rises 0.5% on High Hopes for Imminent Fed Interest Rate Hike

The US Dollar has seen a 0.6% rise against the Euro today, ahead of a predicted interest rate hike from the US Federal Reserve.

Although the expected rate hike has largely been priced in, the US Dollar has still appreciated because of optimism about a potential string of interest rate hikes following this one.

Not everyone has been optimistic about the possibility of more rate hikes, however. Writing for Bloomberg, University of Oregon economist Tim Duy has warned of the dangers of higher rates;

‘Is the Fed more likely to raise rate expectations further as the year progresses, or will policy makers back down to the three rate hikes projected last December?

In recent weeks, the Fed has signalled that the former is more likely than the latter.

There are plenty of reasons that the Fed would remain with a gradual hike path - fears of overheating and inflation have proved unfounded in the past, and this may continue to be the case.

But the Fed is making the case that the path of rate hikes is more likely to rise than to fall. If three expected hikes become four at the next meeting, four could become five in the next projections.

I don’t think the market is prepared for such an outcome, possibly because it is difficult to communicate the potential for a dramatic shift in policy when the Fed is bound so tightly to the language of gradualism.‘

EUR/USD Exchange Rate Forecast: Risk of Further EUR/USD Losses on Falling PMI Stats

The Euro could extend its losses against the US Dollar over the rest of the week, when Eurozone PMI and confidence data is released on 22nd March.

The flash PMI readings for March are predicted to show falling levels of Eurozone manufacturing and services sector activity, which could devalue the Euro.

Ifo confidence readings for March are also tipped to show declining economic outlooks, which may cement Euro to US Dollar exchange rate losses on Thursday.

On the other side of the EUR/USD pairing, the US Dollar could see even greater gains against the Euro on 21st March when the Federal Reserve makes its interest rate decision.

The US central bank is predicted to raise national interest rates from 1.5% to 1.75%, which would be the first increase of 2018.

The Fed last hiked interest rates in December 2017, but is on track for three to four interest rate hikes this year.

As a quarter of 2018 has almost passed, the US Dollar could rise further after the rate decision if Fed policymakers suggest that another interest rate increase could come soon.

The week’s other major US event will be the implementation of metal tariffs on 23rd March.

Although a few countries have managed to gain exemptions from the steel and aluminium tariffs, there will still be near-blanket levels of charges imposed on metals imported into the US.

Economists are divided about whether these tariffs will help or hinder US economic development, but the historic implications of the action may cause a sudden US Dollar drop on Friday.

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TAGS: Euro Forecasts