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Could Discussion of ECB QE Encourage Fresh Euro US Dollar Exchange Rate Rally?

Confidence in the Euro diminished ahead of the European Central Bank’s (ECB) July policy meeting, with investors keen to get a fresh gauge on the current outlook of policymakers.

Although recent Eurozone data has proven more mixed than investors might have liked the potential for the single currency to enter another bullish run remains.

Markets are still sensitive to any shifts in the ECB’s communication, with any acknowledgement of a discussion on the quantitative easing program likely to offer an upside boost to the Euro.

As analysts at Danske Bank noted:

‘The July ECB meeting will, if anything, likely add to upside risks for EUR/USD. When Draghi started the exit talk at the Sintra conference he in our view opened the lid for the cross, i.e. this was the catalyst for starting to correct its long-standing undervaluation. We still see EUR/USD in a range around 1.13 near term but risks remain on the upside longer term.’

Any perception of increased hawkishness could see the Euro US Dollar exchange rate making strong gains, even though the ECB is unlikely to enter a true tightening cycle in the near future.

On the other hand, if President Mario Draghi fails to adopt a more upbeat tone in comments to the press this could leave the Euro vulnerable to a sharp spike in downside pressure.

USD Gains Ground as Market Risk Appetite Fades

The appeal of the US Dollar improved somewhat, meanwhile, even as doubts over the outlook of the US economy persisted.

As the Bank of Japan (BoJ) proved dovish at its latest policy meeting investors were encouraged to pile back into the ‘Greenback’, with the upside potential of the Yen looking rather limited at this juncture.

A weaker sense of market risk appetite also benefited USD exchange rates, with the safe-haven currency strengthening in spite of concerns over the underlying health of the world’s largest economy.

If this afternoon’s jobless claims figures prove positive the US Dollar could find further support, as signs of sustained tightness within the labour market would offer encouragement to Federal Reserve policymakers.

Even as the prospect of another 2017 interest rate hike has dimmed the EUR USD exchange rate is vulnerable to any signs of widening policy divergence between the Fed and ECB.

However, any weaker showing from the Philadelphia Fed business outlook index or the latest leading indicators reading could see the US Dollar trending lower against its rivals once again.

Political developments may also weigh on the ‘Greenback’, as investors lose confidence in the Trump administration’s ability to deliver its promised fiscal reforms.

Current EUR USD Interbank Exchange Rates

At the time of writing, the Euro US Dollar was slumped in the region of 1.1502. Meanwhile, the US Dollar Euro exchange rate was making gains at 0.8691.