Surprise US Core Inflation Uptick Pushes Euro US Dollar (EUR/USD) Exchange Rate Lower
After making solid gains on the back of the Federal Reserve’s latest dovish meeting minutes the Euro to US Dollar (EUR/USD) exchange rate failed to hold onto its positive footing for long.
The mood towards the US Dollar (USD) improved on Thursday afternoon after June’s core consumer price index data showed a surprise improvement on the year.
As the index strengthened from 2.0% to 2.1% this suggests that inflationary pressure within the US economy is not as weak as previously thought.
This stronger showing dented bets that the Fed could engage in a sharp interest rate cut at its July policy meeting, offering USD exchange rates a boost.
Although Fed policymakers still appear on course to loosen monetary policy in the near future, with an imminent rate cut considered a near-certainty, this was not enough to keep the US Dollar under pressure.
Signs of ECB Dovishness Drag on EUR/USD Exchange Rate
The appeal of the Euro (EUR), meanwhile, diminished in response to the release of the European Central Bank’s (ECB) minutes.
As the minutes highlighted a continued shift towards caution among policymakers the likelihood of a 2019 interest rate cut increased.
This naturally left the EUR/USD exchange rate on the back foot, even though June’s German consumer price index saw a modest improvement.
Carsten Brzeski, Chief Economist at ING, noted:
‘The ECB and Mario Draghi have let the genie of more action out of the bottle and it will be hard to get it back in.
‘The ECB can hardly continue talking the talk without walking the walk. The only question is whether words alone, as dovish as they might be, will be enough at the July meeting.
‘We think the only option to once again only talk the talk would be a change in forward guidance, including “or lower”, and thereby opening the door for rate cuts.’
Industrial Production Decline Set to Weaken Euro (EUR) Further
Further weakness could be in store for the single currency tomorrow if May’s Eurozone industrial production data deteriorates as forecast.
After the decline in German production investors are anticipating another underwhelming performance from the manufacturing sector, reflecting the impact of global trade tensions.
Fresh evidence that the Eurozone economy is struggling to recover its lost growth momentum would expose EUR exchange rates to another bout of selling pressure ahead of the weekend.
Unless manufacturing shows signs of resilience the Euro looks set to extend its losses once again.
Additional pressure could come on the back of the latest German wholesale price index data, which is expected to point towards a continued decline in price pressures.
As long as the wholesale price index shows a decline in June this is likely to fuel bets that inflationary pressure will not pick up as the ECB would like in the near future.
With underwhelming data set to add to the case for ECB easing the EUR/USD exchange rate may struggle to gain any particular traction on Friday.