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Confident Fed Rate Hike Sets Euro US Dollar Exchange Rate on Fresh Downtrend

With tensions heightened ahead of this afternoon’s crunch Eurogroup meeting the Euro remained under pressure across the board.

There are concerns that finance ministers may not approve the disbursement of the latest tranche of Greek bailout funds, raising the odds of a fresh Eurozone debt crisis.

As Greece faces a major debt repayment in July any further delays are likely to weigh heavily on the single currency, particularly if creditors continue to lack agreement on the issue of debt relief.

However, the Euro US Dollar exchange rate could rally if there is a satisfactory agreement at this juncture, with the issue of Greek debt sustainability kicked down the road once again.

The mood towards the single currency could sour ahead of the weekend, though, with the finalised Eurozone consumer price index for May likely to see no change.

Given that the European Central Bank (ECB) is still unconvinced that inflationary pressure within the Eurozone is picking up in a meaningful manner this is unlikely to encourage confidence in the Euro.

Even so, confidence in the political outlook of the currency union could improve over the weekend if the results of the French parliamentary election prove positive.

Centrist President Emmanuel Macron’s fledgling En Marche movement looks set to win a landslide victory, with forecasts pointing towards the party gaining a significant majority.

This would enable Macron to push forward with his economic agenda with greater ease, boding well for the French economy and the health of the Eurozone as a whole.

Fed Optimism Boosts US Dollar Outlook

Demand for the US Dollar, meanwhile, picked up in the wake of the Federal Open Market Committee’s (FOMC) decision to raise interest rates to 1.25%.

While this movement was already effectively priced in by markets the relatively optimistic tone of policymakers prompted investors to pile back into the ‘Greenback’.

The Fed did not appear overly concerned by the weakness of recent US data, suggesting that policymakers could still adopt a more aggressive pace of monetary tightening than markets have priced.

As analysts at Deutsche Bank noted:

‘Despite recent disappointing inflation prints, the Fed maintains the view that these inflation misses are largely due to one-off factors and that above-trend growth will keep the unemployment rate below NAIRU, helping to nudge inflation toward target next year. With this outlook, they continue to judge that a gradual removal of accommodation is warranted to guard against risks that the labour market overheats, which could force the Fed to raise rates more aggressively, and more disruptively, in the coming quarters.’

If the latest jobless claims figures continue to point towards a tightening labour market the appeal of the US Dollar could improve further.

A stronger showing from June’s University of Michigan confidence index may also put downside pressure on the EUR USD exchange rate in the near term.

Current EUR USD Interbank Exchange Rates

At the time of writing, the Euro US Dollar exchange rate was slumped in the region of 1.1180. Meanwhile, the US Dollar Euro exchange rate was on an uptrend at 0.8943.