EUR/USD Exchange Rate Dips on Euro Weakness, Risk Aversion
The Euro US Dollar (EUR/USD) exchange rate is sinking this morning as Euro (EUR) investors contemplate the possibility of a recession while the US Dollar (USD) attracts safe-haven support amid turbulent trading conditions.
At the time of writing, EUR/USD is trading at $0.9978, just below today’s opening levels.
Euro (EUR) Fluctuates on Downbeat Economic Forecasts
The Euro is trading in a volatile range against its peers today as fears of a recession amid persistent inflationary pressures weigh upon the single currency. Dampening overall risk sentiment are forecasts that the global core inflation rate – excluding energy – could remain at about 5% next year.
According to The World Bank, inflation may linger at almost double the five-year pre-pandemic average, unless supply chain disruptions and labour market pressures abate. Bank representatives say that to drive inflation lower, central banks may have to raise interest rates by an additional 2 percentage points on top of the 2% increase already seen.
Capping related headwinds, however, are suggestions on how central banks may combat inflation without triggering a recession.
World Bank Vice President Ayhan Kose says that by communicating their policy decisions clearly, publicising credible medium-term fiscal plans and delivering targeted support for vulnerable households, central banks may avert significant economic contractions.
An increasingly hawkish European Central Bank (ECB) has uplifted Euro exchange rates in recent weeks and may continue to do so if the bank pursues its aggressive interest rate hike trajectory.
ECB President Christine Lagarde has given a statement already this morning, commenting:
‘We are facing a supply shock but also strong elements on the demand side. Our actions may weigh on growth, but it is a risk we have to take because price stability is priority.
[Interest rate] hikes should send a signal that we’ll meet our price goal.’
US Dollar (USD) Firms Overall Ahead of Consumer Sentiment Release
The US Dollar (USD) is enjoying tailwinds against the majority of its peers this morning as a risk-off mood boosts the currency and investors anticipate an improvement in September’s consumer sentiment.
Risk-off trading is inspired by both recession fears and concerns that waning productivity in China could have a knock-on affect for global trade. Fresh Covid-19 lockdowns in the country limit China’s manufacturing capacity.
Meanwhile the University of Michigan’s monthly consumer sentiment index provides an indication of morale and inflation expectations. The survey has fallen sharply for much of this year, but rebounded in the last couple of months, potentially as a result of the fall in gasoline prices.
As fuel prices have continued to fall through September, investors wait to see whether this will impact the release. The Federal Reserve will also be eyeing the data ahead of next week’s interest rate decision.
Further buoying the ‘Greenback’ may be news that a potential rail strike appears to have been averted. Amid an onslaught of industrial action in the UK, the prospect of disrupted supply chains and commuter chaos may otherwise have dented USD sentiment.
EUR/USD Exchange Rate Forecast: US Consumer Sentiment to Extend Downturn?
Looking ahead, the main release this afternoon is the US Michigan consumer sentiment index, which will be published at 3pm BST. If consumer sentiment improved in September as expected, the US Dollar is likely to enjoy tailwinds, potentially weighing upon the EUR/USD exchange rate.
Until then, the Euro US Dollar is likely to trade on risk sentiment and other external factors. Upbeat forecasts from ECB members may continue to lend some support to the single currency, although USD is likely to retain the upper hand.
