Euro US Dollar (EUR/USD) Rangebound amid Rising ECB Rate Cut Bets
The Euro US Dollar (EUR/USD) exchange rate is moving without a clear trajectory today as an increasing appetite for risk limits the US Dollar’s (USD) upside against the Euro’s dovish losses.
At the time of writing the EUR/USD exchange rate is trading at $1.0771, virtually unchanged from this morning’s opening rate.
Euro (EUR) Slumps amid Cooling German Inflation
The Euro is wavering against most of its major peers today as the latest German inflation data printed in line with expectations.
While monthly inflation edged slightly higher to 0.2% in January, the annual inflation rate dropped to 2.9%, cooling from last January’s 3.7% and marking the lowest figure since June 2021.
Despite a marginal increase in the latest month-on-month report, significant inflationary cooling over the last year serves to reinforce expectations that the European Central Bank (ECB) could begin cutting interest rates sooner than previously expected.
Claus Vistesen, Chief Eurozone Economist at Pantheon Macroeconomics, explains that rapidly falling energy prices significantly contributed to easing inflation in the Eurozone’s largest economy.
‘Overall, energy prices across key components remained relatively sticky at the start of the year. This is especially true for gas and electricity, considering the sharp decline in wholesale gas prices through 2023… We continue to see downside risks for prices in these components, based on the current trend in market prices.’
US Dollar (USD) Muted amid Increasing Risk Appetite
The US Dollar (USD) is trapped in a narrow range this morning, as a cheery market mood stifles ‘Greenback’ movement.
Despite dwindling Federal Reserve rate cut bets, the safe-haven US Dollar is struggling to catch bids today. Renewed inflationary pressures stemming from Chinese disinflation and escalating tensions in the Middle East continue to drive market volatility, capping USD’s hawkish wins.
However, a return of gloomy trading conditions may see the ‘Greenback’ rebound on waning rate cut bets. While markets had been expectant of a March interest rate cut, increasingly hawkish rhetoric from Fed policymakers has served to undermine the likelihood that monetary policy will begin to loosen in the first quarter.
Following an influx of strong employment data and high demand, policymakers have reverted to restrictive language surrounding Fed interest rates, which could offer USD renewed support as the session progresses.
Euro US Dollar Exchange Rate Forecast: Central Bank Commentary to Drive Volatility?
Looking ahead, both Eurozone and US data are in short supply as the week draws to a close. This leaves the Euro US Dollar exchange rate susceptible to commentary from each currency’s respective central bank.
In the US, a speech from Federal Reserve hawk Lorie K. Logan may lift the ‘Greenback’, should Logan’s commentary echo the increasingly hawkish consensus of Fed policymakers. Following a week of upbeat US data releases, Logan is likely to argue that rates should remain higher for longer, likely boosting market expectations that the Fed will postpone cutting interest rates for an extended period of time.
In the Eurozone, a keynote speech from Piero Cipollone may serve to boost ECB rate cut bets further, should he strike dovish in his address. Despite push back from senior ECB policymakers, cooling inflation and economic slowing may see Cipollone deviate from the central bank’s restrictive narrative, causing EUR to falter.