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Euro US Dollar Exchange Rate Softens after Fed Official Warns Against Rate Hike Delay

EUR USD exchange rate news

While the Euro US Dollar exchange rate benefitted strongly from the more dovish tone of the July Federal Open Market Committee (FOMC) minutes, the pairing failed to hold onto its bullish trend ahead of the weekend.

  • US Dollar dented by less hawkish Fed minutes – Odds of 2016 rate hike revised lower in response
  • ECB seen as maintaining neutral policy bias – Account of July meeting indicated preference for assessing impact of earlier loosening measures
  • German Producer Price Index bettered forecast in July – Market uncertainty failed to impact Eurozone data
  • EUR USD exchange rate predicted to strengthen in response to Eurozone PMIs – Currency union expected to demonstrate further signs of robustness.

Despite the latest Eurozone data proving encouraging the EUR USD exchange rate trended lower on Friday morning.

Dovishness of Fed Minutes Weighed Heavily on US Dollar (USD)

Hopes that the Federal Reserve would return to its monetary tightening cycle in the near future were dented by the central bank’s July meeting minutes. Policymakers were shown to have remained more divided on the subject of interest rates than markets had hoped, suggesting that the doves will keep rates lower for longer. As St Louis Fed President James Bullard also fuelled speculation, expressing a belief that only one rate hike should occur over the next two years, the US Dollar (USD) was prompted to slump. Given the mixed nature of recent US data there seemed to be no particular reason for investors to support the ‘Greenback’.

This benefitted the Euro to US Dollar (EUR USD) exchange rate, which had suffered from a lack of domestic data in the middle of the week. Thursday’s finalised Eurozone Consumer Price Index for July offered some additional support to the Euro (EUR), confirming that inflation within the currency union continued edging higher. Markets were particularly encouraged to find that the European Central Bank (ECB) remains in no hurry to alter its ‘wait and see’ approach regarding monetary policy. With the ECB’s focus primarily on monitoring the impact of the earlier raft of loosening measures, the odds of further easing diminished significantly, boosting the EUR USD exchange rate to a two-month high of 1.1363.

Improved German Producer Prices Failed to Maintain EUR USD Exchange Rate Uptrend

Stronger US data helped to shore up the ‘Greenback’ somewhat ahead of the weekend, with the latest Philadelphia Fed Index and Leading Indicators reports both pointing towards greater robustness. Demand for the US Dollar was also boosted by the hawkish tone taken by San Francisco Fed President John Williams, who expressed concern over the potential damage that could be done by waiting too long to hike interest rates again. With investors assessing USD exchange rates as having been somewhat oversold in recent days a recovery was encouraged, with consolidation trading pushing the ‘Greenback’ higher.

Confidence in the single currency, on the other hand, remained robust thanks to Germany’s Producer Price Index figures for July. Prices bettered forecast on both the month and the year, indicating that inflationary pressure within the Eurozone’s powerhouse economy continued to strengthen in spite of wider market volatility. However, due to the bullishness of the US Dollar the EUR USD exchange rate was unable to make any gains on the back of the data.

EUR USD Exchange Rate Forecast: Stronger Eurozone PMIs Predicted to Benefit Euro

The appeal of the Euro could be further boosted next week if the raft of Eurozone PMIs for August prove encouraging. Expectations are high for the domestic service sector and the German economy in general, which could see the single currency return to a stronger uptrend. However, there are increasing concerns amongst markets over the unbalanced nature of the currency union’s recovery. If growth remains primarily driven by Germany the reaction to the data could be a little more muted, with signs of weakness in France likely to dent sentiment.

Fed speculation will remain the key influence on the US Dollar over the coming days, with markets keen to hear from Fed Chair Janet Yellen. Yellen’s speech at the Jackson Hole Symposium will give investors a more accurate gauge on the current policy outlook, as Kit Juckes, Research Analyst at Societe Generale, noted:

‘If, as well as a cry for easier fiscal policy, the message from Jackson Hole ends up being that rates may rise sooner than expected but will only rise at a glacial pace, then short-term turbulence around FOMC meetings aside, there won’t be a lot on the horizon either to drag the longer end of the Treasury market out of its range, or to dissuade investors from their yield hunting.’

Current EUR, USD Exchange Rates

At the time of writing, the Euro to US Dollar (EUR USD) exchange rate was slumped around 1.1313, while the US Dollar to Euro (USD EUR) pairing was trending higher in the region of 0.8836.