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Euro US Dollar (EUR/USD) Exchange Rate Stablises, But Will Fed Rate Expectations Continue to Drag on the Pairing?

EUR/USD Exchange Rate Holds Steady, But Fed Monetary Policy Could Drive Further Losses

The Euro US Dollar (EUR/USD) exchange rate appears to be holding steady this morning, but analysts warn this respite may be short lived in the face of growing US rate expectations.

At the time of writing EUR/USD exchange rate is holding close to this morning’s opening levels, but still remains close to the four-month low struck on Wednesday.

Fed Rate Expectations likely to Drive Losses in Euro US Dollar (EUR/USD) Exchange Rate

A bout of profit taking has allowed the Euro (EUR) to hold steady against the US Dollar (USD) this morning, but markets are bracing for further losses.

This comes amid the increasingly hawkish outlook among investors regarding the Federal Reserve’s monetary tightening plans, with a recent run of solid US data driving expectations of further rate hikes from the bank.

Ayako Sera, market economist at Sumitomo Mitsui Trust Bank said:

‘Rises in the U.S. interest rates are pushing the US dollar higher. At the moment, inflation is higher and there’s no major risk-off factors, with even the U.S. exit from the Iran nuclear deal having a minor impact. In that kind of environment, interest rates differentials will end up being the main driver for USD.’

Is the US Dollar’s (USD) Rally Set to Run out of Steam?

However at the same time analysts are expressing doubts that the US Dollar’s (USD) recent resurgence has the legs to sustain the currency’s gains through the summer.

Viraj Patel, foreign exchange strategist at ING said:

‘Analysing the three key drivers of this dollar move – and their temporary nature – means we do not see much further scope for USD upside.

We modestly raise our USD forecasts for the summer, but remain convinced that by the end of the year – and into 2019 – structural forces will drive the US Dollar to levels weaker than where it currently trades today.’

This is in line with forecasts made at the start of 2018, with the majority of analysts appearing to agree that the US Dollar exchange rate is set to have moved lower by the end of the year.

EUR/USD Exchange Rate Forecast: US Dollar to Soar as US Inflation Ticks Higher?

Looking ahead markets are bracing the EUR/USD exchange rate to tumble later this afternoon, following the release of the latest US inflation figures.

Economists forecast that today’s Consumer Price Index will reveal US headline inflation will have climbed from 2.4% to 2.5% in April, striking a new one-year high and bolstering the case for the Federal Reserve to continue raising interest rates.

However with the latest US Producer Price Index slowing more than expected last month, it may indicate that inflation failed to pick up as expected, likely dampening the appeal of the US Dollar.

Meanwhile European Central Bank (ECB) President, Mario Draghi is set to speak tomorrow, with the Euro possibly retreating at the end of this week’s session if Draghi appears concerned regarding the recent dip in Eurozone inflation.