Homepage » News » EUR/USD » Euro US Dollar Exchange Rate Strengthens Despite Weaker Eurozone Inflation

Euro US Dollar Exchange Rate Strengthens Despite Weaker Eurozone Inflation

Unemployment in Germany and the wider Eurozone continued to fall, offering support to the Euro even as the latest domestic inflation data proved disappointing.

While weakening inflationary pressure reduces the chances of the European Central Bank (ECB) returning to a tightening bias in the near future the outlook of the Eurozone economy remains positive.

However, as Bert Colijn, Senior Economist at ING, noted:

‘This makes for a difficult situation for the ECB as robust growth and weak price pressures bring about diverging expectations of policy. The ECB will be cautious with its plans for monetary policy to avoid a ‘taper tantrum’, but a change in communication on the balance of risk and the forward guidance can be expected next week.’

With Eurozone inflation expected to remain somewhat muted for the foreseeable future ECB policymakers are unlikely to consider any imminent tapering of its quantitative easing program.

As a result the appeal of the single currency could soften, with markets disappointed that the central bank is keeping up its loose monetary policy even as the domestic economy strengthens.

This could leave the Euro US Dollar exchange rate biased to the downside in the near term, particularly as concerns remain over the approaching Greek bailout repayment deadline.

Any signs that the Eurogroup may fail to approve the disbursement of the next tranche of Greek bailout funds could see the Euro slump sharply.

Confidence in the US Dollar, meanwhile, has remained somewhat limited thanks to doubts over the likelihood of the Federal Reserve raising interest rates at its June policy meeting.

Recent political jitters have encouraged speculation that the Fed may hold tight for the time being, especially after a weaker personal consumption expenditure core report.

As inflationary pressure eased from 1.6% to 1.5% on the year in April the case for Fed policymakers to pursue a more aggressive pace of monetary tightening weakened further.

With the Trump administration looking less likely to deliver on its promised tax cuts and fiscal reforms the ‘Greenback’ has continued to unwind its earlier gains, trending lower across the board.

Further volatility is likely in store for the EUR USD exchange rate ahead of the weekend with the release of the latest US non-farm payrolls report.

Forecasts point towards a relatively steady level of employment and a modest uptick in average hourly earnings in May, which would bode well for the health of the wider economy.

However, if wage growth fails to show signs of picking back up the appeal of the US Dollar could remain muted, offering the EUR USD exchange rate a fresh rallying point.

Current EUR USD Interbank Exchange Rates

At the time of writing, the Euro US Dollar exchange rate was making gains in the region of 1.1212. Meanwhile, the US Dollar Euro exchange rate was trending lower at 0.8916.