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Central Bank Policy Speculation Limits Euro US Dollar Exchange Rate Strength Ahead of Jackson Hole

Confidence in the Euro has remained decidedly lacking at the start of the week, with markets bracing for the Jackson Hole symposium and any fresh commentary from central bank policymakers.

Even after reports from European Central Bank (ECB) insiders that President Mario Draghi is not intending to make any fresh commentary on monetary policy the Euro remains vulnerable to market speculation.

Investors are reluctant to rule out the possibility of Draghi offering at least some hint at the policy outlook of the ECB, which could offer the Euro US Dollar exchange rate a solid rallying point.

However, as analysts at Danske Bank noted:

‘ECB President Mario Draghi is set to be among the speakers for the first time in three years. In 2014, he hinted at QE and now the focus is on tapering signals. We expect him to deliver a dovish message and to not give any new communication on the issue of tapering of asset purchases.’

If Draghi does not deliver any suggestions regarding the tapering of the quantitative easing program this could lead to fresh investor disappointment, pushing the Euro into another downtrend.

Ahead of Jackson Hole the single currency could also experience volatility on the back of August’s ZEW economic sentiment surveys for Germany and the Eurozone as a whole.

Forecasts point towards an easing in domestic confidence which could weigh heavily on EUR exchange rates in the short term, even as the currency union continues to demonstrate solid levels of economic growth.

US Dollar Downside Exposed by Political Developments

Domestic political worries have undermined the strength of the US Dollar in recent days, with markets increasingly losing faith in the abilities of the Trump administration.

With Trump looking increasingly isolated in the wake of his response to events in Charlottesville there are concerns that promised infrastructure investment and tax reforms may never materialise.

Given that these pledges were behind much of the US Dollar’s rally in the aftermath of the election this exposes USD exchange rates to significant downside weakness.

Commentary from Federal Reserve Chair Janet Yellen could offer support to the ‘Greenback’, however, if this boosts the odds of the central bank raising interest rates a third time before the end of the year.

If the Fed looks set to continue its monetary tightening cycle this could dent the EUR USD exchange rate, particularly if the ECB maintains a more dovish policy outlook itself.

However, any signs of weakening growth from the Chicago Fed national activity index or the Dallas Fed manufacturing index could return the US Dollar to a bearish trend in the short term.

Current EUR USD Interbank Exchange Rates

At the time of writing, the Euro US Dollar exchange rate was trending lower in the region of 1.1740. Meanwhile, the US Dollar Euro exchange rate was making modest gains around 0.7769.