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Anticipation Ahead of Fed Policy Decision Keeps Euro US Dollar on Downtrend

With markets bracing for the conclusion of the latest Federal Open Market Committee (FOMC) policy meeting the Euro US Dollar exchange rate remained trapped in a narrow range.

Despite Greece successfully returning to the bond markets on Tuesday, also indicating an intention to hold further bond sales in the coming months, the single currency struggled to hold onto any positive momentum.

In the wake of an unexpected uptick in the US consumer confidence index the mood towards the US Dollar improved somewhat, even though the underlying health of the world’s largest economy remains questionable.

However, the EUR USD exchange rate could find a rallying point tonight if the Fed meeting offers a less optimistic message on monetary policy.

While markets do not anticipate any major shift in the central bank’s outlook at this juncture the ‘Greenback’ is still vulnerable to any sense of investor disappointment.

As analysts at Nomura noted:

‘Core goods CPI inflation for June came in on the weak side again, leaving the question of how much of the recent weakness is transitory still unresolved. Against this backdrop, we think the July FOMC statement may provide some additional nuance on how the FOMC sees the recent underperformance of inflation, although we expect the main message that the FOMC expect inflation to move up to its 2% target over the medium term to be reiterated. Other than inflation, we do not expect the statement’s views on the economy or the economic outlook to materially change.’

On the other hand, any indications that the Fed remains on track to raise interest rates again before the end of the year could prompt the US Dollar to surge higher across the board.

Could German Inflation Data Dent Euro Demand?

Confidence in the Euro could weaken ahead of the weekend, meanwhile, with focus falling on July’s German consumer price index report.

Following the more dovish tone taken by European Central Bank (ECB) President Mario Draghi after last week’s policy meeting the prospect of tightening seems to remain a relatively distant one.

As a result any softening in the German inflation rate could weigh heavily on the mood towards the single currency, diminishing the odds of any shift in the ECB outlook further.

However, if inflationary pressure in the Eurozone’s powerhouse economy picked up on the year this could offer EUR exchange rates a fresh rallying point.

A stronger showing from the second quarter French gross domestic product could also encourage investors to pile back into the Euro.

Current EUR USD Interbank Exchange Rates

At the time of writing, the Euro US Dollar exchange rate was trending lower at 1.1620. Meanwhile, the US Dollar Euro exchange rate was making gains in the region of 0.8603.