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ECB Monetary Policy Speculation Weighs on Euro US Dollar (EUR/USD) Exchange Rate

Euro US Dollar (EUR/USD) Exchange Rate Loses Momentum Ahead of ECB Policy Meeting

Although the Euro to US Dollar (EUR/USD) exchange rate lost some momentum ahead of the European Central Bank (ECB) policy meeting the pairing remained in the region of a two-year high.

However, the Euro (EUR) may struggle to capitalise further on the relative weakness of the US Dollar (USD) if the tone of today’s meeting proves less hawkish in nature.

With ECB President Mario Draghi likely to talk down the prospect of any imminent monetary tightening action the upside potential of the Euro looks distinctly limited at this juncture.

Weaker odds of the ECB winding down its long-running quantitative easing program before the end of the year could weigh heavily on the EUR/USD exchange rate.

Even so, if there are signs of increasing division amongst ECB policymakers at large on the subject of monetary policy this may limit any Euro softness in the short term.

Protectionist US Rhetoric Diminishes Appeal of US Dollar (USD)

Demand for the US Dollar is likely to remain rather weak ahead of the weekend, though, to the benefit of the EUR/USD exchange rate.

The increasingly belligerent and protectionist stance adopted by US officials at the World Economic Forum, in particular Treasury secretary Stephen Mnuchin, has generally spooked investors.

As Viraj Patel, research analyst at ING, noted:

‘We suspect it is the sheer frankness of Mnuchin’s comment and the idea that the Trump administration is happy to employ ‘America First’ policies – even if it means at the cost of a weak $ – that has caught markets by surprise. Still, we’re scratching our heads for catalysts to see a break in this weak $ trend – and at the moment it could be one way traffic (bar any major surprises from the ECB today).’

Mounting fears over the prospect of a trade war with China, and the administration’s apparent lack of concern about a weaker US Dollar, looks set to keep the EUR/USD exchange rate generally supported.

Solid US GDP Forecast to Increase Pressure on EUR/USD Exchange Rate

The EUR/USD exchange rate could face some downside pressure if Friday’s US gross domestic product report and durable goods orders data betters forecast, however.

As long as the world’s largest economy continues to demonstrate a fairly robust level of growth the mood towards the US Dollar is likely to improve to at least some degree.

Forecasts point towards a loss of momentum in the annualised GDP on the quarter, though, which may undermine any potential USD exchange rate buoyance.

Political worries are still likely to remain the key influence on the US Dollar over the coming days, especially if the Trump administration continues to ramp up its protectionist approach to trade.

With the odds of any imminent Federal Reserve policy action looking rather slim the downside bias of the EUR/USD exchange rate is likely to be limited for some time to come.