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Euro US Dollar (EUR/USD) Exchange Rate Skyrockets as EU Inflation Prints as Expected

July 19, 2022 - Written by John Cameron

Euro-to-US Dollar-rate-

EUR/USD Exchange Rate Catapulted by EU Rate Hike Bets

The Euro US Dollar (EUR/USD) exchange rate has shot up this morning to a 13-day high, bolstered by hawkish comments from European Central Bank (ECB) officials. The US Dollar (USD) continues to correct down against its peers, despite a risk-off mood, on quiet trading conditions.

At the time of writing, EUR/USD is trading at €1.0260, up 1.1% from today’s opening levels.

Euro (EUR) Enjoys EU Investor Optimism

The Euro (EUR) is buoyed by domestic tailwinds today, as Eurozone inflation printed as expected – supporting the case for aggressive monetary policy tightening from the ECB.

Following the release, ECB policymakers are discussing the possibility of a 50bps interest rate hike on Thursday – according to Reuters. Such a move may be deemed necessary to combat high inflation.

Reuters’ report also confirmed that the ECB were homing in on a deal to provide bond market assistance to countries like Italy if they stick to European Commission rules on reforms and budget discipline.

Markets have been sceptically awaiting the central bank’s new ‘tool’ – a promised mechanism to help developing EU economies adjust to steeper and fasted interest rate hikes.

The central bank is now expected to unveil the ‘anti-fragmentation instrument’ next week, according to economists surveyed by Bloomberg.

Kristian Toedtmann, an economist at Dekabank, remarks:

‘By being deliberately vague, central bankers hope that on the one hand the sheer existence of such a tool will be enough to avoid turmoil in financial markets, and on the other hand purchases of government bonds aren’t frequent enough to substantiate allegations of monetary financing.’

Previous asset-purchase programs instated by the ECB have triggered lawsuits in Germany, where a belief in monetary orthodoxy is widely upheld.

US Dollar (USD) Strength Slackens despite Risk-Off Mood

The US Dollar is trending down against its peers today, as a quiet US docket exposes the ‘Greenback’ to losses.

Furthermore, receding bets for a 100bps interest rate hike next week are weighing upon the currency. Several members of the FOMC said last week that they were not in favour of the larger rate increase suggested by market pricing:

‘Moving too dramatically will undermine a lot of the other things working well,’ commented Atlanta Federal Reserve President Raphael Bostic on Friday at an event hosted by the Tampa Bay Business Journal. ‘We want it to be orderly’ and for people to have ‘the right perceptions’ about the economy.

Nevertheless, the Fed is still expected to deliver a larger rate hike later in the year to tame inflation: headline CPI printed at 9.1% in June, a fresh four-decade high.

Energy prices surged 7.5% on the month and were up 41.6% on an annualised basis; the food index increased 1%, while shelter costs rose 0.6% in June and were up 5.6% annually. A large portion of overall price increases came from gasoline, which increased 11.2% on the month and just below 60% for the 12-month period.

Controversially, some believe that July’s data may reveal a slowing in the pace of inflation. According to Energy Information Administration data, gasoline prices have softened from their June peak, costing 4.7% less than previously.

Moreover, the S&P GSCI commodities index – a broad-based measure of prices for multiple goods – fell 7.3% in July as wheat futures fell 8% and soybeans are down by 6%. The index remains 17.2% up for the year, however.

EUR/USD Exchange Rate Forecast: Fedspeak to Shed Light on Bank’s Forward Action?

Looking ahead, a speech this evening from the Fed’s Lael Brainard may influence USD trading, buoying the currency if Brainard strikes a hawkish tone. Ongoing risk-off sentiment could also lend support to the ‘Greenback’.

Meanwhile, the Euro is likely to trade on market speculation over Thursday’s interest rate decision. Traders may hesitate to place bullish bets tomorrow ahead of the ECB’s release.

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