Hawkish US Fed Hopes Limit the Euro US Dollar (EUR/USD) Exchange Rate
The Euro US Dollar (EUR/USD) exchange rate collapsed on Tuesday, tumbling as markets optimistically prepared for this week’s run of US Federal Reserve Policymaker speeches and tomorrow’s highly anticipated US Federal Open Market Committee (FOMC) meeting minutes.
It would appear that the strong performance of the US economy has finally (if not only temporarily) driven the ‘Greenback’ into the realm of Dollar bulls, with the above-forecast inflation print, robust growth, extremely tight labour market and optimism for the sweeping tax reform measures driving hopes that the US Fed will have to move for a rate hike as early as March this year.
This would shift the bank’s planned rate hikes this year up from 3 to 4.
It should be stressed, however, that some analysts worry that an overly aggressive run of rate hikes could cause more harm than good for the US economy, with many also apprehensive regarding the sharp widening of the US fiscal deficit.
Nonetheless, if the minutes reveal an optimistic, or hawkish sentiment then the ‘Greenback’ could find greater purchase, particularly with the European Central Bank (ECB) deemed not likely to move for a rate hike for some time.
German ZEW Economic Sentiment Index Slips – EUR Exchange Rates Struggle to Find Support
The Euro (EUR) tumbled on Tuesday, limited by the currently rallying Pound (GBP) and a worsening economic outlook this month amongst German investors.
The Mannheim-based ZEW research institute revealed that their February economic sentiment index dropped to 17.8, down from the previous period’s 20.4 but above the market consensus of 16.
This is, however, still a robust reading, with the German economy also expected to benefit from steadily rising consumer prices over the next 6 months.
Germany’s ZEW ‘current situation’ reading for February also contracted, this time from 95.2 to 92.3, below the forecast of 94.0.
This is the second-highest reading on record, however, thus analysts were not massively concerned with the fall.
Beyond this, the current resurgence in strength of the US Dollar (USD) has siphoned demand away from the single currency, with markets prioritising the ‘Greenback’ on account of the imminent FOMC meeting minutes.
EUR/USD Exchange Rate Forecast: Eurozone Consumer Confidence in the Spotlight
The Euro could encounter further difficulties against the US Dollar today (EUR/USD) when the Eurozone’s consumer confidence estimate is released.
The flash estimate for February is currently expected to reveal a decline in the index from 1.3 points, to 1.
Whilst this is admittedly a contraction, a score of 1 would still reveal an upbeat attitude towards the bloc’s economy – with the figure determined by the difference between positive and negative answers.
Beyond this and tomorrow’s FOMC meeting minutes markets will largely be focused on tomorrow’s run of Eurozone purchasing managers’ index (PMI) readings, with the manufacturing, services and composite readings expected to slip, but still remain on very positive form.
Nonetheless, a slip below the market consensus could prompt anxiety within the markets and give the US Dollar an even greater lead.