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Euro US Dollar Exchange Rate Trends Narrowly as ECB Maintains Dovish Inflation Message

Things remained volatile for the Euro US Dollar exchange rate this week as markets reacted to the latest commentary from Federal Reserve policymakers.

In spite of a more hawkish tone taken at the June policy meeting the outlook of the Fed looks rather less optimistic at this juncture, limiting the odds of further monetary tightening before the end of the year.

Both Chicago Fed President Charles Evans and Dallas Fed President Robert Kaplan sounded a cautious note on the policy outlook, suggesting that interest rates may not rise again in the coming months.

The relative weakness of recent inflation and growth data suggests that the world’s largest economy may not be in such a strong state as policymakers hope, limiting the prospect for further tightening and the appeal of the US Dollar.

This offered the EUR USD exchange rate some support, although the pairing was trending in a narrow range on Thursday morning.

ECB Bulletin Maintains Neutral Policy Outlook

Investors are continuing to speculate over the policy outlook of the European Central Bank (ECB), meanwhile.

The latest ECB Economic Bulletin took a positive view of the domestic economy, indicating greater confidence amongst policymakers regarding the health of the Eurozone.

However, the central bank offered a fresh caution on the subject of inflation, noting that softening oil prices are likely to have a dampening impact on inflationary pressure.

As a result the Euro trended lower, with the ECB seeming to reaffirm its intention to leave monetary policy unchanged for the foreseeable future.

In an increasingly familiar refrain, the bulletin noted:

‘Measures of underlying inflation have remained low and have yet to show convincing signs of a pick-up, as unutilised resources are still weighing on domestic price and wage formation. Underlying inflation is expected to rise only gradually over the medium term, supported by the ECB’s monetary policy measures, the continuing economic expansion and the corresponding gradual absorption of economic slack.’

An uptick in the finalised Eurozone consumer confidence index for June could offer the Euro a rallying point, though.

The latest raft of Eurozone manufacturing and service PMIs may also bolster EUR exchange rates, unless economic activity shows signs of easing on the month and points towards a loss of domestic momentum.

So long as data continues to paint a stronger picture of the Eurozone economy, and concerns over Greece remain limited, the appeal of the single currency could improve, though.

On the other hand, the US Dollar may find support on the back of June’s new home sales data, with a stronger housing market boding well for the wider US economy.

Current EUR USD Interbank Exchange Rates

At the time of writing, the Euro US Dollar exchange rate was trending narrowly around 1.1165. Meanwhile, the US Dollar Euro exchange rate was similarly range-bound in the region of 0.8954.