Following a subdued night of trading on Wednesday the Euro US Dollar (EUR USD) exchange rate began to slide again this morning as traders were spooked by comments from the ECB.
Markets were concerned by a report from Reuters that suggested that that the European Central Bank (ECB) was wary of making any changes to its outlook for monetary policy next month despite presenting a seemingly hawkish message following its last meeting.
One of the officials spoken to reportedly said that markets had actually ‘overinterpreted’ Mario Draghi’s post meeting statement at the start of March in which the ECB President said that the Eurozone was no longer at risk of deflation.
The remark had sent EUR investors into a frenzy following the meeting as they began to speculate that the Bank would seek to tighten its monetary policy in December.
However the official disputed this theory saying that its ultra-loose policy was likely to remain in place for the foreseeable future and commented;
‘We wanted to communicate reduced tail risk but the market took it as a step to the exit, the message was way overinterpreted.’
The report was a major blow to the Euro and more conservative European policymakers who had hoped that the ECB would signal the winding down of its quantitative easing programme in the coming months in preparation for an interest rate hike sometime next year.
The single currency was also weakened today as investors speculated over the implications of Brexit on the Eurozone economy.
While the UK is expected to take the brunt of the damage over the split, analysts have pointed out that the European financial system is tied closely to the city of London which could cause complications and uncertainty as it is untangled from the city.
There are also worries that manufacturers on the continent may lose free access to a large consumer base, possibly applying pressure on firms.
Meanwhile the US Dollar has struggled to advance despite Pending Home sales rising at a faster pace than expected in February.
According to the National Association of Realtors, sales rocketed up from -2.8% to 5.5% last month, sailing past expectations that sales would only reach 2.4%.
The jump was largely attributed to buyers attempting to avoid higher interest rates ahead of the multiple rates hikes forecast from the Federal Reserve this year.
However it was not enough to reverse the current ‘Trump Slump’ in the US Dollar as markets remain concerned that the president’s ambitious stimulus policies may face an uphill battle in congress after the defeat of his healthcare bill last week.
Looking ahead to tomorrow, the EUR USD exchange rate may weaken as the Eurozone inflation rate is expected to drop from 2.0% to 1.8% in March following a slide in oil prices in recent weeks.
However, should Germany’s unemployment rate manage to have pushed lower in February then the Euro may see some gains at the start of the day.
Meanwhile St. Louis Federal Reserve President James Bullard will speak tomorrow, possibly leading to a drop in the US Dollar if the typically dovish policymaker indicates that the Fed will only raise interest rates two additional times this year.
Current Interbank Exchange Rates
At the time of writing the EUR USD exchange rate was trending around 1.07 and the USD EUR exchange rate was trending around 0.93.