Less Hawkish Tone of Fed Minutes Boosts Euro US Dollar (EUR/USD) Exchange Rate
Although the Euro to US Dollar (EUR/USD) exchange rate came under some pressure ahead of the Federal Open Market Committee’s (FOMC) December meeting minutes this bearishness ultimately proved short-lived.
Confidence in the US Dollar (USD) diminished once again in the wake of the minutes, which were less hawkish in nature than markets had forecast.
Policymakers continued to disagree on the subject of inflation looking forward, throwing the odds of another imminent interest rate hike into some doubt.
As analysts at TDS commented:
‘Some saw inflation as remaining low, while others saw risks that the tax cuts could overheat the economy to and thus boost inflation.
‘On net, a greater number of meeting participants appeared to expect inflation to gradually return to target, thus warranting a December hike and gradual further normalization. However, no signals about March were given. We expect the next hike will be in June rather than March as the market has priced.’
This encouraged markets to return to a more bearish view of the US Dollar, to the benefit of the Euro (EUR).
Euro (EUR) Exchange Rates Rally as Eurozone Growth Hits Seven-Year High
The EUR/USD exchange rate also found a rallying point on the back of the finalised raft of Eurozone services PMIs for December, which showed a slight upwards revision.
Following on from Tuesday’s stronger-than-expected manufacturing PMIs, this painted an encouraging picture of the domestic economy as it headed into 2018.
Put together, the PMIs showed that growth across the Eurozone rose to its highest level since 2011, rounding off another strong year for currency union’s economy.
Naturally, this bolstered the appeal of the Euro, even though the data is unlikely to be enough to alter the policy bias of the European Central Bank (ECB).
While the Eurozone economy continues to power ahead of its rivals the possibility of any imminent monetary tightening action from the ECB remains distinctly slim.
However, while this lingering sense of dovishness limited the gains of the EUR/USD exchange rate the pairing nevertheless returned to an uptrend on Thursday morning.
EUR/USD Exchange Rate Forecast to Strengthen if Eurozone Inflation Rises as Forecast
Further volatility is forecast for the EUR/USD exchange rate ahead of the weekend, with markets bracing for the latest US non-farm payrolls report and Eurozone consumer price index.
While forecasts point towards a slight slowing of job creation in the US on the month a solid headline figure could still shore up the US Dollar.
If average earnings figures also show improvement this could raise hopes of the Fed raising interest rates again sooner rather than later, putting fresh downside pressure on the EUR/USD exchange rate.
Even so, the mood towards the Euro could pick up further if the Eurozone CPI core measure points towards an uptick in inflationary pressure.
As much of the ECB’s dovishness is attributable to concern over the persistent sluggishness of domestic inflation any increase may prompt speculation over a potential shift in the central bank’s outlook.
Any disappointment, though, would see the EUR/USD exchange rate falter once again.