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Euro US Dollar Exchange Rate Pushes Higher as ECB Policymakers Turn Hawkish on Inflation

Euro US Dollar Exchange Rate Benefits as ECB Policymakers Adopt More Hawkish Outlook 

Although January’s Eurozone trade surplus narrowed further than forecast this failed to prevent the Euro to US Dollar (EUR/USD) exchange rate from rallying at the start of the week. 

Demand for the Euro (EUR) was supported by the hawkish nature of recent comments from European Central Bank (ECB) policymakers, who sounded a more optimistic note on the subject of inflation. 

Governing Council members Klaas Knot and Francois Villeroy de Galhau both took a rather positive stance on the outlook for consumer prices, suggesting a greater shift towards monetary tightening within the central bank. 

All in all, this paints a more encouraging picture of the ECB’s policy outlook, to the benefit of EUR exchange rates. 

As analysts at Rabobank commented: 

‘Looking at the various ‘leaks’ in the wake of the ECB meeting, we would argue that they have served to reinforce the market pricing that was already in place – i.e. that of a first rate hike by mid-2019. The current basis for staff calculations –a small QE extension and a mid-2019 hike– may be an acceptable middle-ground for the entire Council. 

‘We would argue, however, that risks to the current market pricing are skewed. Indeed, we find it quite unlikely that the ECB will move sooner on rates, even if the Council doesn’t extend net purchases into Q4 (note that an extension is still our base case). But, conversely, risks of a delayed rate hike are still present.’ 

Trade War Fears Limit Demand for US Dollar Despite Forecast Fed Rate Hike 

Confidence in the US Dollar (USD), meanwhile, remained largely muted thanks to lingering market worries over the stability of the Trump administration, offering further support to the EUR/USD exchange rate. 

With markets still concerned by the prospect of a global trade war, and the possibility of the US imposing additional tariffs on China, USD exchange rates have struggled to find any particular headroom. 

Even so, the downside potential of the US Dollar remains limited at this juncture thanks to high expectations that the Federal Reserve will raise interest rates again on Wednesday. 

While the impact of another rate hike has already been largely priced into the US Dollar this has helped to somewhat temper the upside potential of the EUR/USD exchange rate. 

However, if the Fed adopts a more hawkish tone with regards to the future path of monetary policy, and the prospect of up to three more rate hikes before the end of the year, this could encourage the US Dollar to push higher once again. 

Further EUR/USD Exchange Rate Gains Forecast on Optimistic ECB Bulletin 

The publication of the ECB’s latest Economic Bulletin may offer the EUR/USD exchange rate further support, meanwhile. 

Any additional indications that policymakers are taking a more optimistic view of the domestic economy could see the Euro making fresh gains. 

However, as March’s raft of Eurozone manufacturing and services PMIs are forecast to show a slight loss of momentum on the month EUR exchange rates could still see some softness this week. 

With the ZEW economic sentiment surveys also expected to show a dip in domestic confidence the EUR/USD exchange rate may struggle to hold onto its stronger footing in the coming days.