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Euro US Dollar (EUR/USD) Exchange Rate Slumps on US Rate Hike Optimism

Euro US Dollar

EUR/USD Exchange Rate Dips ahead of Fed Chair Powell Speech

The Euro US Dollar (EUR/USD) exchange rate trended down overall through today’s session in spite of record-high inflation in the Eurozone. Hawkish comments from the European Central Bank (ECB) lent some upside, however, causing a brief upturn in the exchange rate.

At the time of writing, EUR/USD is trading at $1.0862, up slightly from today’s opening levels.

US Dollar (USD) Climbs Haltingly on Rate Hike Hopes

The US Dollar (USD) traded up against its peers today, albeit falteringly, as USD investors were offput by comments from the Federal Reserve which varied in tone.

Ahead of today’s speech from chairman Jerome Powell, Chicago Fed President Charles Evans noted he was not expecting inflation to drop back to 2% next year, though conceded that special factors driving inflation higher may ramp down.

Elsewhere, San Francisco Fed President Mary Daly remarked it would be ‘abrupt or surprising’ to see the policy rate rising to 2.5% this year.

The mixed signals follow Fed meeting minutes which stated ‘that a move to tighter [monetary] policy could be warranted, depending on economic and financial developments.’ The vagueness of this statement points to the unpredictability of market dynamics amidst, among other things, the war in Ukraine.

While such unpredictability capped significant gains for the ‘Greenback’, however, the currency was buoyed by expectations that Powell’s speech this afternoon would be more hawkish.

With inflation reaching a 30-year high in March 2022, the pressure is on the Federal Reserve to address price pressures amidst ongoing supply chain bottlenecks and volatile trading relationships.

Euro (EUR) Enjoys Inflation-Inspired Tailwinds

The Euro (EUR) enjoyed upside against several of its peers through today’s session as rare hawkish comments from the European Central Bank buoyed the single currency.

The Euro area’s finalised inflation reading hit 7.4% in March 2022, on an annualised basis – 0.1% below the previous estimate but still the highest rate on record. The war in Ukraine and sanctions on Russia pushed fuel and natural gas prices to levels which drove up the CPI.

Even before the data came out, ECB policymaker Martins Kazaks’s commented that a rate hike was possible as soon as July; following the CPI release, an ECB source told reporters that some policymakers will be pushing for a 50bps at the next opportunity.

Governing Council member Pierre Wunsch is one in favour of a more hawkish approach, remarking that the European Central Bank could lift policy rates above zero before the end of the year unless the euro-zone economy suffers a severe shock, and might even have to deploy ‘restrictive’ policy to get surging prices under control.

Nevertheless, analysts at ING Bank remind traders that the ECB rarely remains hawkish. There is a possibility, say economists, that the ECB sticks to normalisation, hiking rates by 25bp in September and December, but delivers no further rate hikes.

Such a move could ultimately weigh upon EUR exchange rates.

EUR/USD Exchange Rate Forecast: PMIs, Ukraine Tensions to Drive EUR/USD Movement?

Looking ahead, tomorrow’s PMI data may influence the Euro US Dollar exchange rate. While activity in the service and manufacturing sectors is expected to have fallen across the bloc, service-sector activity in the US is forecast to have remained the same in April as in March, potentially boosting USD.

Meanwhile, the situation in Ukraine continues to dominate risk sentiment and remains in the headlines: today’s International Monetary Fund seminar focused heavily upon the war as the US and its allies agreed to tighten the vice of sanctions against Russia.

Any further developments in this area could also affect EUR/USD.