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EUR to USD Exchange Rate Weakness Persists on Perceived Central Bank Divergence

April 24, 2018 - Written by Frank Davies

Markets are increasingly expecting wider policy divergence from the European Central Bank (ECB) and the Federal Reserve, and low ECB interest rate hike bets are leaving the Euro to US Dollar (EUR/USD) exchange rate unappealing. The pair is currently on track to see its second consecutive week of losses.

Last week saw EUR/USD slide around half a cent, from 1.2335 to 1.2288, despite briefly touching a high of 1.2402. EUR/USD has continued to fall since Monday, and on Tuesday morning briefly touched on its lowest level since January 2018 – 1.2188.

EUR Remains Weak as Eurozone Confidence Data Largely Falls Short of Forecasts


Market expectations that the European Central Bank (ECB) will be leaving Eurozone monetary policy on hold for the foreseeable future has left investors with little reason to buy the Euro, and recent Eurozone data has not changed that.

Tuesday saw the publication of some April confidence stats from France, Germany and Italy. Most of the prints fell short of forecasts.

French business confidence was forecast to remain at 110, but instead slipped to 109. Italian business confidence also disappointed, sliding from 108.9 below the forecast 108.7 to 107.7.

Ifo’s German confidence figures fell short in every major print. Current conditions fell from 106.6 to 105.7 and expectations from 103.3 to 102.1. The key business climate figure missed the forecast 102.7 and slid from 103.3 to 102.1.

The only notable figure that beat expectations on Tuesday was Italy’s April consumer confidence report, which only slipped from 117.5 to 117.1 rather than falling to 116.9.

Overall the data reflected the current mood of Euro trade, which was that the bullish run the currency saw in late 2017 and early 2018 had come to an end.
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EUR/USD has seen much narrower trade in recent months, due to expectations that the Eurozone’s strong growth was slowing and steadying out.

According to Alessio de Longis, money manager at OppenheimerFunds Inc.:

‘We expect the Dollar bear market to take a pause, in other words the Euro bull market to take a pause

We are right now much closer to a neutral stance in the Euro versus the Dollar, waiting on the sidelines.’


USD Strengthens as US Economic Outlook Continues to Strengthen


US Treasury 10-year bond yields have recently touched their best levels in over four years and have neared the level of 3% for the first time since January 2014 too.

The recent strong performance in US bond yields has indicated that investors are becoming more confident in the US economic outlook, with inflation expected to rise and the Federal Reserve expected to continue tightening US monetary policy.

Speculation is ramping up that the Fed will be pressured into taking a more hawkish than expected tone on US monetary policy too.

As a result, the perceived policy divergence between the cautious European Central Bank (ECB) and the relatively hawkish Federal Reserve is leaving bond yields and the US Dollar itself more appealing.

Tuesday’s US data was solid too, which helped the US Dollar to hold this week’s gains against the Euro.

US new home sales came in at 0.694m rather than the forecast 0.63m and March’s monthly figure came in at 4% rather than the forecast 1.9%.

CB’s US consumer confidence results were solid too, rising from 127.0 to 128.7 rather than sliding to the forecast 126.

EUR/USD Forecast: European Central Bank (ECB) Policy Decision Ahead


The Euro to US Dollar exchange rate’s movement may be limited on Wednesday, as traders may be awaiting Thursday’s highly anticipated European Central Bank (ECB) policy decision before making any moves on the Euro.

Wednesday will see the publication of French consumer confidence and jobless claims data. The day’s Eurozone data is unlikely to be influential and no notable US data will be published until Thursday either.

As a result, EUR/USD may remain weak due to a generally stronger US Dollar. EUR/USD weakness is especially likely if US bond yields continue to see strong performance too.

The ECB is not expected to announce any changes in monetary policy during its April policy decision on Thursday, but any change in tone on the bank’s outlook is likely to have an effect.

If the bank is more cautious than markets hope, the Euro to US Dollar exchange rate could see further losses towards the end of the week.

US Dollar trade could weaken instead however, if Thursday’s US goods orders or Friday’s US growth projections disappoint investors.
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