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Euro US Dollar (EUR/USD) Exchange Rate Dips, Rebounds on Weaker Greenback

Headquarters of the European Commission

EUR/USD Exchange Rate Reverses Losses as USD Corrects Lower

The Euro US Dollar (EUR/USD) exchange rate is rebounding this afternoon having sunk earlier today. Markets continue to digest the European Central Bank (ECB)’s 75bps rate hike, as rate setters defend yesterday’s move.

At the time of writing, EUR/USD is trading at €1.0040, up 0.3% from today’s opening levels.

Euro (EUR) Struggles amid Risk-On Trading Conditions

While climbing against the US Dollar (USD), the Euro (EUR) is faltering in several other exchange rates. Risk-on sentiment draws demand to perceived-riskier currencies such as the Australian Dollar (AUD).

Further suppressing demand for the single currency is the ongoing energy crisis in Europe. Ministers from the European Union met today to ask the Commission to suggest emergency liquidity measures.

Messaging was mixed, with many representatives insisting that support measures must be immediate.

Irish Environment Minister Eamon Ryan urged ‘the commission proposals have to be delivered within weeks not months’. Subsequently, Czech Industry Minister Jozef Sikela told reporters: ‘I hope we will be able to conclude the discussions by the end of September.’

The European Central Bank (ECB) also weighed in on the discussion, seeking to prepare bank executives for a potential surge in company defaults. The central bank ruled out financial support for struggling energy firms, laying that responsibility with EU governments.

In other ECB news, the Financial Times reports that the central bank will start discussions on shrinking its balance sheet in early October. This follows on from hawkish comments from policymakers, who justify yesterday’s large interest rate hike by pointing at the state of inflation across the bloc.

US Dollar (USD) Drops on Downward Correction

The US Dollar corrected lower against its peers today, as investors cashed in following a week of risk-averse stimuli. Global recession fears, political change in the UK and the death of England’s Queen all influenced currency markets through the weekly session.

A risk-on mood also weighed upon the safe-haven ‘Greenback’ today, as investors flocked to support risk-on assets.

Commentary from the Federal Reserve, though hawkish on the whole, diverged slightly towards the end of the week. Chicago Fed President Charles Evans, a renowned dove, said he was open-minded between a 50 or a 75bps interest rate hike at the next policy meeting.

The US central bank will soon enter a blackout period ahead of its policy meeting on 20-21 September.

EUR/USD Forecast: Lack of Data to Expose Exchange Rate to External Factors?

Looking ahead, the Euro US Dollar exchange rate is likely to trade on external factors on Monday, given a lack of significant economic data.

Risk sentiment may inform trading, as a return to risk aversion would lend support to the ‘Greenback’.

Meanwhile, further hawkish rhetoric from the ECB could buoy the Euro. On the other hand, gains might be capped by ongoing energy supply concerns.