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Euro US Dollar (EUR/USD) Exchange Rate Soars despite Falling German Inflation

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Euro US Dollar (EUR/USD) Exchange Rate Rallies Despite Softening German Inflation

The Euro US Dollar (EUR/USD) exchange rate is rallying this morning, despite German inflation softening further than expected.

At the time of writing, EUR/USD is trading around US$1.0770, a rise of roughly 0.5% from the morning’s opening rates.

Euro (EUR) Limited by German Inflation Miss

Bar soaring above the US Dollar (USD), the Euro (EUR) is seeing mixed trade this morning. Germany released their delayed inflation data for January, and showed that harmonised inflation was below forecasts.

As such, the Euro’s appeal has been limited this morning. However, with headline CPI climbing to 8.7%, there is still room for the European Central Bank (ECB) to continue hiking rates.

Yesterday, ECB policymaker Klaas Knot stated that:

‘If underlying inflation pressures do not materially abate, maintaining the current pace of hikes into May could well remain warranted.’

Bringing a further modest tailwind to the single currency could be its negative correlation with the ‘Greenback’. With the US Dollar currently trading weakly, the Euro may be being cushioned from further losses.

US Dollar (USD) Falls as Investors Adjust Fed Rate Hike Bets

The US Dollar (USD) is on the backfoot this morning, as Federal Reserve rate hike bets are readjusted.

While Wednesday saw a litany of hawkish speeches from Fed officials, investors remain unconvinced that the Fed will continue hiking.

Francesco Pesole, FX Strategist at ING, explained:

‘This might be a sign that markets are seeing this moment as the peak in the Fed’s hawkish communication and are now eyeing opportunities to re-enter short-USD pro-cyclical positions at more attractive levels.’

This was further compounded by an overnight decline in US Treasury yields, which are a usual barometer for rate hike expectations.

Adding further pressure to the ‘Greenback’ is the morning’s upbeat market mood. Due to the US Dollar’s safe-haven status, investors moving to riskier assets is keeping USD rates lowered.

Euro US Dollar (EUR/USD) Exchange Rate Forecast: US Consumer Sentiment to Buoy USD?

Looking ahead, the core catalyst of movement for the US Dollar is likely to be tomorrow’s Michigan Consumer Sentiment index. The index is forecast to tick upward from 64.9 to 65, reflecting a modest increase in consumer optimism.

While remaining low, this increase may buoy the US Dollar, due to the US economy’s consumption based nature. If US consumers appear more optimistic, then it may assist the US in sidestepping a recession.

For the Euro, data is thin on the ground through to the end of the week. As such, market sentiment may play a role in shaping the single currency. With Ukrainian President Volodomyr Zelenskiy currently meeting European leaders, if he secures additional support EUR could waver.

While it may lead to optimism that the end is in sight for the Ukraine-Russia war, fears of further escalations could keep the single currency down.