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EUR USD Exchange Rate Heads Higher ahead of ECB Rate Decision

Euro exchange rate forecast


  • Euro (EUR) Exchange Rates Hold Weak Position – ECB expected to hold rates tomorrow but deliver dovish press conference
  • US Dollar (USD) Exchange Rates Tick Lower – Market sentiment improves
  • EUR USD Exchange Rate Round 1.1 – Will overvaluation concerns hamper USD?
  • EUR USD Forecast to Decline – Draghi to deliver dovish speech

EUR USD Exchange Rate Ticks Higher but Draghi Expected to Deliver Dovish Speech

Although the European Central Bank (ECB) is widely expected to keep monetary policy unchanged today, most analysts believe that President Mario Draghi will deliver a dovish speech. However, the EUR USD exchange rate ticked fractionally higher in the early stages of Thursday’s European session thanks to improved risk-appetite.

Meanwhile, the EUR GBP exchange rate firmed following the publication of less-than-impressive UK retail sales figures.

(Previously updated July 20, 2016 @ 16:54)

The EUR USD exchange rate broke through the psychological resistance level of 1.1000 after a string of positive US data results prompted renewed optimism of a near-term Federal Reserve rate hike. Meanwhile, rising bond prices and speculation that the European Central Bank (ECB) will deliver a dovish accompanying speech to the interest rate decision tomorrow weighed on EUR demand.

EUR USD Exchange Rate Forecast to Hold Losses ahead of ECB Rate Decision

As traders look ahead to Thursday’s ECB interest rate decision the EUR USD exchange rate is expected to remain below physiological resistance. Whilst ECB policymakers are not expected to make any alterations at this time, owing to the need for a greater understanding of the impact of Brexit, the accompanying press conference is likely to see President Mario Draghi deliver a dovish speech.

‘On the margin, the BOE’s ‘nondecision’ last week also plays in favour of the ECB taking its time to refine its response,’ said analysts at Bank of America Merrill Lynch. ‘Upon meeting on 21 July, resilient markets after the Brexit vote will, in our view, allow the ECB’s Governing Council to stop at simply delivering hints at an imminent additional layer of stimulus on 21 July, reserving hard announcements for September.’

European ecostats had minimal impact today with trader focus dominated by the ECB’s rate decision. June’s German Producer Prices bettered expectations on both a monthly and annual basis, but May’s Eurozone Current Account saw the surplus fall.

The threat to EU stability from the Italian banking crisis and Spain’s persistent budget deficit continues to weigh on EUR exchange rates. Fears of contagion from the UK’s exit also continues to undermine confidence in the single currency.

USD EUR Exchange Rate Forecast to Advance on Safe-Haven Demand

After the International Monetary Fund (IMF) warned of a global economic slowdown and commodities price gains showed signs of slowing, market sentiment dampened considerably. As a safe-haven asset, the US Dollar advanced.

Also highly supportive of demand for the US Dollar has been a succession of positive ecostats. The health of the domestic economy has caused many analysts to bring forward bets regarding a near-term cash rate increase from the Federal Reserve.

‘There’s certainly a growing crowd of investors that are warming up to the notion that the abundance of strong US economic data may light a fire under the Fed and lead to a surprise rate hike by year-end,’ said Singapore-based trader Stephen Innes.

However, there are a number of factors that may cause long-term delays to a Federal Reserve rate hike. One of the major issues is the poor state of global economic health. Another headwind is the high value of the US Dollar. If the Federal Reserve hike rates, the US Dollar will appreciate further. This could have a significantly detrimental impact on export growth and could see a large reduction in foreign investment.

EUR USD Exchange Rate Forecast to Extend Losses despite ECB Inaction

Although the vast majority of analysts do not expect the ECB to alter policy outlook tomorrow, it will be unlikely to result in a significant EUR appreciation given that the move has been priced-in. What’s more, if Draghi delivers a dovish accompanying speech the single currency could tank.

Meanwhile, the US Dollar is likely to find continued support thanks to demand for safe-haven assets. However, USD overvaluation will be a major concern and could see traders pull away. Additionally, the comparatively high trade weighting of the US Dollar could see traders take profits.

Thursday’s US labour market data may cause US Dollar volatility during Thursday’s North-American session.

The EUR USD exchange rate was trending within the range of 1.0980 to 1.1030 during Wednesday’s European session.