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Euro to US Dollar (EUR/USD) Exchange Rate Soft as ECB’s Cœuré Paves the Way for Further Negative Interest Rates

One of the top European Central Bank (ECB) policymakers has defended negative interest rates, weakening the Euro to US Dollar (EUR/USD) exchange rate. Meanwhile, the US Dollar (USD) is advancing ahead of today’s key employment figures.

Euro to US Dollar (EUR/USD) Exchange Rate: Cœuré Defence of Negative Rates Suggests Further Cuts

Banks and economists may have argued that negative interest rates are damaging growth, but ECB policymaker Benoît Cœuré has claimed that they have been effective. Negative interest rates, which are essentially a fee on bank deposits aimed at encouraging financial institutions to lend more, have been criticised for harming bank profits and squeezing their margins. However, at his latest appearance in Frankfurt, Cœuré has said that banks have dealt well with below-zero rates and that the biggest threats to the sector come from external sources.

According to Cœuré, ‘Many banks have been able to more than offset declining interest revenues with higher lending volumes, lower interest expenses, lower risk provisioning and capital gains. Last year, for example, euro area banks’ aggregate net interest income increased, especially as crisis-hit banks refinanced expiring high-yield liabilities.’

Investors have interpreted his comments as yet another sign that more easing is on the way in March, with predictions for ECB action including a further cut to the negative deposit rate and an increase in the monthly rate of asset purchases, currently at €60 billion.

The Euro to US Dollar exchange rate is currently trading around 1.0861.

US Dollar to Euro (USD/EUR) Exchange Rate: Will Fed’s Williams Speech Increase Rate Hike Predictions?

The US Dollar has remained strong following yesterday’s positive data, with the ISM Manufacturing index performing well relative to forecasts. The index shows that the sector remained in contraction in February, but the rate of decline slowed dramatically, from 48.2 to 49.5, a whole point above predictions and very near to the no-growth score of 50.

The news, coupled with Friday’s strong GDP and Personal Consumption figures, has increased market outlook on the US economy to such an extent that Fed funds futures have placed the potential for a rate hike in 2016 back on the table. Just a week ago, the likelihood was that the next increase in US interest rates wouldn’t take place until February 2017.

Despite dovish warnings from Federal Reserve policymakers, including the highly-influential New York Fed President William Dudley, the futures market now predicts a 51% chance of a rate hike in November, although the likelihood of a hike in March continues to dwindle, currently being below 6%. With another policymaker, John Williams, due to speak later today, there is a significant chance this outlook could change.

The US Dollar to Euro (USD/EUR) exchange rate is currently trading between 0.9189 and 0.9216.

Euro to US Dollar (EUR/USD) Exchange Rate Forecast: US Employment Data in Focus

With no Eurozone data left to be released during today’s European session, all attention will be on the US ADP Employment Change figures. These figures are considered a strong indicator as to the performance of the more influential Non-Farm Payrolls data, which will be released on Friday. A strong reading from the ADP data suggests a similar performance for NFP and that could further up the bets on a rate hike by the Federal Reserve this year.

The Euro to US Dollar (EUR/USD) exchange rate is currently trading between 1.0845 and 1.0881.