Euro US Dollar Exchange Rate Sinks on Dovish ECB Guidance
(Updated 16:00, 15/06/2022) The Euro US Dollar exchange rate dipped this afternoon following an impromptu meeting of the European Central Bank‘s rate-setting governing council.
Euro investors had anticipated decisive forward guidance from the central bank in order to tackle escalating debt in European countries such as Italy, Greece and Spain. Yet the guidance issued was considered vague and insufficient.
Jack Allen-Reynolds, senior Europe economist at Capital Economics, said the decision ‘fell short’:
‘Flexible PEPP reinvestments might buy policymakers a little time, but the new ‘anti-fragmentation instrument’ that the Bank is working on will need to go a whole lot further.
There is no guarantee that they reach a consensus on such a tool at the next policy meeting in July, so we could see spreads widen further before a new tool is in place.’
In response to the announcement, the yield on the 10-year Italian bond fell further alongside borrowing costs for other Eurozone governments.
Original article continues below:
EUR/USD Exchange Rate Climbs on Bearish USD Trading
The Euro US Dollar (EUR/USD) exchange rate is rising so far today as US Dollar (USD) traders are hesitant to place bullish bets ahead of the Federal Reserve’s interest rate decision.
Meanwhile, the Euro (EUR) is buoyed by the prospect of an unscheduled meeting of the European Central Bank (ECB)’s rate-setting governing council.
At the time of writing, EUR/USD is trading at $1.0493, up 0.5% from today’s opening levels.
US Dollar (USD) Succumbs to Downside on Fed Speculation
The US Dollar (USD) is weakening against several of its peers today, as markets speculate over the likely outcome of the Federal Reserve Bank’s interest rate decision.
Neil Wilson, chief market analyst at Markets.com, observes that today’s unscheduled meeting of the ECB ‘is kind of stealing the thunder from the Fed’; but the US Dollar remains in the spotlight given the US economy’s major role in determining global market dynamics.
Wilson further notes:
‘A lot of banks have changed their forecasts to a 75bps hike and market pricing has move aggressively in that direction. However, I still prefer a 50bps move with the Fed maintaining optionality to do more 50bps hikes for the rest of the year – a strong signal for one in September.’
Initially, the ‘Greenback’ appeared to enjoy a boost against its rival currencies, hitting a 20-year peak as investors calculated that an aggressive rate hike could tip the economy into a recession and thereby attract safe-haven support to the currency.
‘It’s still too early to say a recession is definitely coming in the US, but a ‘hard landing’ seems very hard to avoid at this point given the way inflation is still rising.’
US bond yields bounded to their highest levels in years at the end of last week, further supporting the prospect of a recession as the gap between 2- and 10-year yield narrowed; however, yields are now retreating along with USD optimism.
Euro (EUR) Buoyed by Impromptu ECB Meeting
The Euro enjoys upside support this morning as the European Central Bank announced an unscheduled meeting to discuss the recent sell-off in government bonds, which pushed yields sharply higher.
The fact of the meeting has already brought down painfully high yields on Italy’s 10-year bond. Yields hit an eight-year high earlier this week but have since fallen by 20 bps, or 4%.
Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, speculates:
‘We should get a statement [from the ECB] along the lines reflecting a willingness to act [on inflation] and then maybe they will also task committees to work on options, this is what was missing from last week [when the bank had a scheduled meeting].’
Such a statement would echo the comments of policymaker Isabel Schnabel, who remarked yesterday that the ECB was ‘closely’ monitoring the bond yield situation and was ready to deploy both existing and new tools if it found that market moves were ‘disorderly’.
Countering EUR upside somewhat is weaker economic data from the Euro area. Industrial production in the Euro area rose by 0.4% in April but remains below the first average quarter as industries deal with ongoing supply chain issues and weakening demand.
Furthermore, the Euro area’s trade in goods balance dropped by more than expected to €-31.8bn on a seasonally adjusted basis. Analysts blame high energy prices due to the war in Ukraine.
Euro US Dollar Exchange Rate Forecast: Fed Decision Will Be Main Market Mover
Looking ahead, the decision of the Federal Reserve bank is likely to have the biggest impact today upon the Euro US Dollar exchange rate.
If the bank hikes by an aggressive 0.75% – which would mark the biggest increase since 1994 – the ‘Greenback’ is likely to assert gains against EUR and its other peers, while market mood sours on escalating fears of a recession.