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Euro US Dollar (EUR/USD) Exchange Rate Holds Ground Ahead of Fed Rate Decision

Easing German Producer Prices Limit Euro US Dollar (EUR/USD) Exchange Rate Strength

The Euro to US Dollar (EUR/USD) exchange rate remained on a soft footing after May’s German producer price index data fell short of forecasts.

As the price index showed a surprise contraction of -0.1% on the month this raised fresh concerns over the inflationary outlook within the Eurozone’s powerhouse economy.

This underwhelming showing naturally added to bets that the European Central Bank (ECB) will cut interest rates in the coming months, responding to the lack of growth in inflationary pressure within the currency union.

However, after the dovishness of yesterday’s comments from ECB President Mario Draghi the downside potential of the Euro (EUR) proved limited.

While markets now widely expect to see the ECB engage in fresh monetary loosening before the end of the year the EUR/USD exchange rate was able to stabilise for the time being.

US Dollar (USD) Weakens in Anticipation of Fed Interest Rate Cut Hint

Demand for the US Dollar (USD) was generally muted on Wednesday as investors braced for the Federal Open Market Committee’s (FOMC) June policy announcement.

Although no change in interest rates is forecast at this stage the nature of the FOMC’s commentary could provoke some sharp movement for USD exchange rates.

If the Federal Reserve signals an intent to cut interest rates in the near future the US Dollar could enter a fresh slump.

On the other hand, a less dovish message from policymakers may encourage USD exchange rates to rally overnight.

As analysts at TD Securities commented:

‘Chair Powell will likely look to put markets more at ease by reiterating his comments a few weeks ago that the Fed is ready to act if conditions warrant it. The Fed will likely stress that they are monitoring risks on the economy and taking appropriate action to sustain the expansion.’

Any reduction in the odds of an imminent interest rate cut could see the EUR/USD exchange rate trending lower.

Additional Signs of ECB Caution to Weigh on EUR Exchange Rates

The tone of the latest ECB Economic Bulletin could prompt further losses for the single currency on Thursday.

Further signs of dovishness may increase the odds of a 2019 interest rate cut, leaving EUR exchange rates exposed to another bout of selling pressure.

Unless the ECB expresses some sense of optimism regarding the Eurozone’s economic outlook the mood towards the Euro is likely to deteriorate.

Even so, Friday’s raft of Eurozone manufacturing and services PMIs may offer the EUR/USD exchange rate a rallying point ahead of the weekend.

Evidence that economic activity picked up in June would improve the chances of a stronger second quarter gross domestic product reading, to the benefit of the single currency.

If the manufacturing sector slips further into a state of contraction, though, this may further dampen the appeal of the Euro.