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Could Dovish Draghi Extend Euro US Dollar Exchange Rate Losses?

Ahead of the European Central Bank’s (ECB) June policy meeting the mood towards the Euro was somewhat bearish.

After a report from Bloomberg raised the prospect of the ECB cutting its inflation forecasts EUR exchange rates slumped sharply across the board.

This undermined market hopes that policymakers could adopt a more optimistic view on monetary policy as a result of positive first quarter Eurozone growth data.

Although German industrial production rebounded further than forecast in April this was not enough to shore up the Euro US Dollar exchange rate on Thursday morning.

An unexpected upwards revision to the first quarter Eurozone gross domestic product also failed to boost demand for the Euro, given the ECB’s persistent focus on inflation over other growth indicators.

However, the appeal of the single currency could improve if ECB President Mario Draghi proves less cautious in tone than expected at this afternoon’s press conference.

If the central bank ultimately does not revise its inflation forecasts lower this could also encourage investors to pile back into the Euro ahead of the weekend.

Even though any tapering of the quantitative easing program remains a distant prospect, markets could still be encouraged by any indication that policymakers are taking a less dovish stance on policy.

US Dollar Jittery in Anticipation of Comey Testimony

Confidence in the US Dollar, meanwhile, could be shaken by the much-anticipated appearance of former FBI James Comey before the Senate Intelligence Committee.

Comey’s testimony could damage the credibility of the Trump administration further, eroding the likelihood of it delivering on its promised infrastructure investment and fiscal reforms.

The hearing could give rise to renewed speculation over the possibility of impeachment, adding to downside pressure on the ‘Greenback’.

Even so, the EUR USD exchange rate may struggle to hold onto any gains for long unless Comey’s testimony provokes a sense of significant political uncertainty.

Underlying support for the US Dollar is likely to remain ahead of next week’s Federal Reserve interest rate decision.

As Jean-François Robin, research analyst at Nomura, noted:

‘We are still anticipating another 25bp movement after the one in June. The market has completely priced in the 14/06 hike, but has only priced in 2 rate hikes between now and next year after that. The DOTS have to be watched closely to see if the Fed will maintain its 2 expected hikes this year and the same number next year.’

If the Fed indicates that it will pursue a more aggressive pace of monetary tightening over the course of the year this could boost the appeal of the US Dollar, regardless of political jitters.

Current EUR USD Interbank Exchange Rates

At the time of writing, the Euro US Dollar exchange rate was trending lower at 1.12. Meanwhile, the US Dollar Euro exchange rate was making gains in the region of 0.88.