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Euro to US Dollar Exchange Rate Extends Recovery on European Central Bank (ECB) Speculation

Euro to US Dollar Exchange Rate Higher on Bets of Quantitative Easing Tapering

Signs of confidence from the European Central Bank (ECB) that Eurozone inflation is improving has made investors more eager to buy the Euro to US Dollar (EUR/USD) exchange rate this week. This also weighed on US Dollar (USD) sentiment.

The Euro (EUR) looks to be on track to see another week of gains against the US Dollar, following last week’s narrow climb from 1.1657 to 1.1662.

On Thursday morning, EUR/USD touched a high of 1.1830 – the pair’s best level in around half a month – and continued to trend near that high at the time of writing.

While the fresh comments from European Central Bank (ECB) officials showed no surprise shifts in tone or revealed anything new, markets found the comments highly reassuring following weeks of uncertainty on Eurozone political jitters.

Meanwhile, the US Dollar is increasingly predicted to have reached the end of its rally and economists are beginning to forecast that falls are ahead for the currency.

Euro (EUR) Exchange Rates Climb on European Central Bank (ECB) Bets

The Eurozone’s economic and political uncertainties have weighed on the Euro in recent weeks, but some optimistic comments from European Central Bank (ECB) Chief Economist Peter Praet were enough to make investors more bullish again.

Praet indicated that the bank would discuss the withdrawal of its quantitative easing (QE) as soon as its policy decision next week, indicating to markets that QE tapering was still on track to happen later this year.

Signs that the bank will wind back its massive stimulus program have indicated to investors that the Eurozone’s inflation rate is finally seeing a more subdued recovery, boosting confidence in the bloc’s economic strength.

It also showed that the bank was not notably worried about a populist coalition government taking power in Italy, helping political jitters to ease further.

Versus the US Dollar, investors are expecting more gains for the Euro which is keeping the shared currency appealing. According to Kyosuke Suzuki from Societe Generale:

‘In the near term, we are likely to see event-driven trading on the Euro. We should expect the Euro to jump 100 pips (one cent) quite easily on comments from key officials,’

US Dollar (USD) Exchange Rate Demand Limited as Rally Continues to Fade

Following the US Dollar’s strong performance for most of the second quarter, some analysts predict that the currency’s strength could be about to fade.

The US Dollar rally is ending and investors have little fresh reason to keep buying the currency unless there are more signals that the Federal Reserve will ramp up the pace of interest rate hike plans.

According to Shaun Osborne from Scotiabank:

‘The Dollar’s short-covering rally is running out of steam with a lot of good news in terms of growth and rate expectations priced in,’

Essentially, market expectations for a strong US economy, US interest rate hikes and higher US Treasury bond yields have all been priced into the US Dollar already.

With other major central banks, such as the European Central Bank (ECB), showing signs of tightening monetary policy soon and heading to normalised policy, the US Dollar’s appeal in terms of monetary policy divergence has faded somewhat too.

Euro to US Dollar (EUR/USD) Forecast: Central Banks in Focus Next Week

Friday’s US wholesale inventories results from April may cause some late-week movement in the Euro to US Dollar (EUR/USD) exchange rate, but for now the pair appears likely to sustain another week of gains – its biggest weekly gain in quite some time.

Even if Friday’s US data impresses enough to push EUR/USD lower, the pair is still on track to have climbed around a cent throughout the week.

EUR/USD is only likely to shed more of its gains if Eurozone political news or European Central Bank (ECB) comments unwind some of the market bullishness seen this week.

Next week will be an influential one for the Euro to US Dollar exchange rate however, with both the Federal Reserve and European Central Bank (ECB) holding June policy decisions.

Markets have priced in an interest rate hike from the Federal Reserve for next week, but the ECB is not expected to make any changes to monetary policy.

Still, if the ECB announces any plans regarding tapering its quantitative easing (QE) scheme, the Euro to US Dollar (EUR/USD) exchange rate could see even further gains next week.