Euro US Dollar (EUR/USD) Exchange Rate Strikes Weekly High as Fed Signals Only Two More Rate Hikes in 2018

March 22, 2018 - Written by John Cameron

STORY LINK Euro US Dollar (EUR/USD) Exchange Rate Strikes Weekly High as Fed Signals Only Two More Rate Hikes in 2018

The Euro US Dollar (EUR USD) exchange rate struck a new weekly high this morning in the wake of the Federal Reserve’s latest rate decision.

US Dollar (USD) Slumps in Wake of Fed Rate Decision

The US Dollar suffered heavy losses against the Euro and most of its other peers on Wednesday evening as the Federal Reserve concluded its latest policy meeting.

As had been overwhelming predicted by economists in the run up to the meeting, the Federal Open Market Committee (FOMC) voted to raise the bank’s benchmark rate to 1.75% this month.

However with the near certainty of the hike meant that the move had been priced in by investors some time ago, greatly limiting the US Dollar’s potentially gains in the wake of the announcement.

In fact USD began to fall sharply as investors quickly turned to the bank’s accompanying statement and a press conference by Fed Chair Jerome Powell.

A broadly positive statement read;

‘Information received since the Federal Open Market Committee met in January indicates that the labour market has continued to strengthen and that economic activity has been rising at a moderate rate. Job gains have been strong in recent months, and the unemployment rate has stayed low.’

However this couldn’t hide the fact that the Fed struck a more cautious tone in its outlook for further rate hikes this year as the bank confirmed that only two more hikes would be targeted, disappointing many investors amid speculation that the bank could aim for up to four total rate hikes in 2018.

On top of this markets were further unsettled by Powell’s warning that business leaders had raised concerns over the potential of the US to spark a trade war, something many analysts fear could hinder US growth.

Euro (EUR) Weakened as Eurozone Growth Slows

Meanwhile the Euro was forced to relinquish a significant portion of Wednesday’s gains this morning following the release of some weaker than expected PMI figures from the Eurozone.

According to data compiled and published by IHS Markit, the Eurozone’s latest composite PMI plummeted from 57.1 to 55.3 in March falling well below expectations of a more modest slide to 56.7.

Both the service and manufacturing sectors appeared to face pressure from the poor weather this month, while the strength of the Euro also appeared to hamper growth.

This saw expansion in the Eurozone’s private sector fall to its lowest levels since January 2017, and has increased speculation that the bloc’s stellar growth may be beginning to moderate this year.

Chris Williamson, Chief Business Economist at IHS Markit said;

‘While the first quarter average PMI reading remains relatively robust, indicative of GDP rising by 0.7-0.8%, the loss of momentum since the buoyant start to the year has been quite dramatic.

This suggests that Eurozone growth peaked around the turn of the year and the region is settling into a slower, but still robust pace of expansion.

Price pressures have meanwhile also eased slightly, in part linked to cheaper imports arising from the euro’s recent strength, but remain elevated.’

EUR/USD Exchange Rate Forecast: Will another Decline in US Goods Orders Weaken USD?

Looking ahead the EUR/USD exchange rate may trend higher again at the end of this week’s trading session as the US publishes its latest Durable Goods Order figures.

Economists forecast that orders will have slumped again last month, with order growth expected to decline by a further 0.1%.

While this will be an improvement on the 3.7% decline witnesses in January it is unlikely to stoke any great demand for the US Dollar.

Meanwhile with no more notable Eurozone data set for release this week, EUR investors may look towards next week’s session, with the focus likely to be on Germany’s latest inflation figures.

Another fall this month could weigh heavily on the Euro as it will further dent hopes of the European Central Bank (ECB) striking a more hawkish tone anytime in the near-future.

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TAGS: Euro Forecasts