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Dovish Fed Meeting Prompts Rise in EUR USD Exchange Rate

  • EUR USD Jumps Following Fed Meeting – The central bank votes to hold rates while casting doubts on March rate hike.
  • EU Report Weighs on Euro – Warns remaining 27 members of the union could be damaged by bad Brexit deal.
  • Draghi Speech Ahead – Will ECB president discuss the winding down of stimulus programme?

The EUR USD exchange rate rallied to a new two-month high this morning following a dovish meeting from the Federal Reserve.

Euro US Dollar (EUR USD) Appreciates as Fed Dampens Hopes for Rate Hike

The Euro jumped against the US Dollar yesterday evening following a brief lull earlier in the afternoon as the Fed voted to leave US interest rates unchanged at its first meeting of the year.

Investors had not expected the Fed to raise rates in February’s meeting but there had been some murmurs that Fed Chair Janet Yellen would hint towards a possible hike in March, following the forecast in the previous meeting that there would be up to three rate hikes in 2017.

The dovish tone of the announcement now has economists re-evaluating their expectations, with many now expecting the first rise of 2017 will come in June instead. As Lee Ferridge of State Street Global Markets explains;

‘The market is currently attaching around a 25 percent probability to a hike in March and that is unlikely to change substantially following the broadly neutral statement. While a March move is still possible, it seems that the June meeting is now the most likely time for the next hike.’

While the Fed was fairly upbeat about the state of the US economy, it appears to be holding off announcing future rate hikes due to the uncertainty of the economic impact of Donald Trump’s presidency.

Trump is still yet to outline his ambitious stimulus plans that played a major role in his election, instead spending his first couple of weeks in office pushing through some controversial policies on border control and immigration that have spooked the markets.

Euro Slip Prompted by EU Report

The Euro briefly slipped yesterday afternoon following the publishing of a leaked EU report on the consequences of Brexit if a ‘workable’ deal is not formed with the UK.

The paper warns that the City of London must be protected in negotiations with Theresa May as the remaining 27 members economies could be damaged if the City losses out in negotiations, due to the Eurozone’s reliance on its financial services sector, as it read;

‘The exclusion of the main European financial centre from the internal market could have consequences in terms of jobs and growth in the EU. It is in the interest of EU 27 and the UK to have an open discussion on this point.’

The leaking of the report has greatly weakened the position of EU leaders in the run up to negotiations with the UK and suggests that London’s lucrative banking sector will not be persuaded to move to the continent.

EUR USD Exchange Rate Forecast: Draghi to Speak this Afternoon

The EUR USD exchange rate may rally this afternoon following a speech by European Central Bank (ECB) President Mario Draghi in Ljubljana. Markets are hoping to hear if the recent surge in Eurozone inflation will push the central bank to consider tapering its quantitative easing programme.

Meanwhile the US Dollar may attempt to claw back some of its losses later today as analysts expect US jobless claims to drop from 259k to 250k in January, with the continued improvement in the US job market likely to increase the pressure on the Fed to raise interest rates.

Current Interbank Exchange Rates

At the time of writing the EUR USD exchange rate was trending around 1.08 and the USD EUR exchange rate was trending around 0.92.