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Euro Exchange Rates Trend Higher Amid Central Bank Policy Speculation

In spite of the latest positive signs from the German economy the Euro struggled to hold onto a stronger footing against the Pound or US Dollar.

Demand for the single currency eased during Tuesday’s European session, with expectations for an imminent return to tighter monetary policy from the European Central Bank (ECB) still receding.

However, with May’s Eurozone industrial production forecast to show a solid uptick the mood towards the Euro soon improved once again.

Although strong domestic data has failed to sway ECB policymakers enough to return to an explicit tightening bias a positive showing here would increase the pressure on the central bank.

While limited domestic inflationary pressure remains a barrier to any tapering of the quantitative easing program that is unlikely to particularly deter market speculation ahead of next week’s policy meeting.

Even so, the confirmation of a slowdown in inflationary pressure in the finalised German consumer price index for June could dent EUR exchange rates on Thursday.

GBP EUR Exchange Rate Remains Volatile on BoE Rate Hike Bets

The appeal of the Pound, meanwhile, saw renewed volatility in response to the latest comments from Bank of England (BoE) policymakers.

Markets were ultimately discouraged when BoE deputy governor Ben Broadbent failed to make any mention of monetary policy, scuppering bets that the policymaker could shift towards a more hawkish outlook.

With the prospect of an imminent BoE interest rate hike seeming to fade further the Euro Pound exchange rate quickly regained some of its lost ground.

Further losses could be in store for the Pound if tomorrow’s raft of UK labour market data fails to impress.

Forecasts point towards a fresh slowdown in wage growth, which would bode ill for the outlook of the wider domestic economy which has benefitted from strong levels of consumer spending for some time.

Could Hawkish Yellen Boost US Dollar Demand?

Confidence in the strength of the US economy remains somewhat muted this week, with domestic data continuing to paint a rather mixed picture.

With controversy surrounding the Trump administration beginning to heat up once again the Euro US Dollar exchange rate found some fresh traction.

Analysts at Scotiabank maintain that the ‘Greenback’ is likely to remain biased to the downside, noting:

‘The expectation that the USD rally would start to reverse in the coming months was premised on the idea that the US’ growth and interest rate advantage would start to weaken as we moved through the latter stages of this year and into 2018. That idea is starting to look prescient. Simply put, a lot of the good news for the USD is already largely factored.’

So long as Federal Reserve Chair Janet Yellen adopts a relatively hawkish tone in comments to Congress the US Dollar is likely to remain supported by bets that interest rates will rise again before the end of the year.

Even with further monetary tightening already priced into USD exchange rates investors are still likely to pile into the ‘Greenback’ in response to any hawkish rhetoric.

Current EUR GBP USD Interbank Exchange Rates

At the time of writing, the Euro Pound exchange rate was making gains around 0.8870. Meanwhile, the Euro US Dollar exchange rate was trending narrowly in the region of 1.1407.