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Euro US Dollar Advances Again as Fed Rate Hike Bets Drop

  • Euro US Dollar Exchange Rate Tests 1.17 – Ends the week near two-year-highs
  • Federal Reserve Unexpectedly Dovish – US Dollar slumps on Wednesday
  • USD Update: US Growth Unsurprising – Fails to boost Fed rate hike bets
  • Forecast: Eurozone Unemployment – Due Monday

Despite tumbling on Thursday afternoon, the Euro US Dollar exhange rate surged again at the end of the week as the day’s US growth data failed to impress traders.

US growth met expectations came in at 2.6% quarter-on-quarter as forecast, which analysts noted was consistent with the boosts the US economy typically gets in Q2.

PCE prices failed to meet expectations and slowed to 0.3% while Michigan’s inflation expectations survey remained at 2.6% rather than improving to the forecast 2.7%. Fed rate hike bets dropped again on Friday afternoon.

The Euro was given an afternoon boost as Germany’s July inflation projections beat expectations in both monthly and yearly prints. As a result, EUR USD looked to end the week near the key level of 1.17.

[Previously updated 16:42 BST 28/07/2017]

After surging to new 2017 highs on Wednesday night, the Euro US Dollar exchange rate shed some of its gains during Thursday’s American session as investors reacted to the latest US durable goods orders results.

The June print surprised investors, coming in well above expectations of 3% and surging to 6.5%. The May figure was also revised higher from -1.1% to -0.1%.

As a result, markets became more confident that the Fed would hike US interest rates again before the end of 2017. Bets of a rate hike taking place in December rose to above 50%, boosting the US Dollar and pushing EUR USD down from its highs, back into the region of 1.16.

[Published 09:59 BST 27/07/2017]

The Euro US Dollar exchange rate saw yet another jump in value on Wednesday evening as investors reacted to the Federal Reserve’s latest policy decision. Rates were left frozen as expected, but the Fed was unexpectedly cautious and unclear on its policy outlook.

EUR USD trended flatly near the week’s opening level of 1.1663 for most of the week, until the Fed’s meeting. Following the meeting, the pair surged to a new two-year-high of 1.1765. The pair held above the key level of 1.17 at the time of writing.

Euro (EUR) Supported by Solid Domestic Data

Euro trade has been steady and relatively flat this week. It lacks fresh buy-appeal since last week’s seemingly hawkish statements from European Central Bank (ECB) President Mario Draghi, but solid domestic data has helped the shared currency to hold its ground near highs.

Ifo’s German business confidence surveys from earlier in the week beat expectations in every major print, as did Italian consumer and business confidence from yesterday.

Thursday saw the publication of Germany’s August consumer confidence survey from GfK, which beat expectations of remaining at 10.6 and advanced to 10.8.

Spain’s key Q2 unemployment rate was also published, which surpassed the projected 17.8% and improved from 18.75% to 17.22%.

Analysts are noting that this week marks the fifth anniversary of the time ECB President Mario Draghi first pledged to do ‘whatever it takes’ to save the Euro.

Within that time, pundits have gone from speculating a potential fallout of the Eurozone to seeing the light at the end of the tunnel. Still, as the ECB has mentioned in recent months its work is not yet done.

US Dollar (USD) Sold as Federal Reserve Takes Surprisingly Cautious Tone

The US Dollar saw another slump in the middle of the week as investors reacted to the Federal Reserve’s latest policy decision.

As expected, the Fed left monetary policy frozen. It was the bank’s statement and forward guidance that caused some confusion in markets.

The bank’s statement indicated that it would begin to withdraw its huge balance sheet ‘relatively soon’, which marked a shift in tone from previous statements that it would do so ‘this year’.

However, markets are uncertain if this is a hawkish or dovish change. FX strategist Vassili Serebriakov from Credit Agricole still expects action to be taken in September;

‘In our mind, ‘relatively soon’ is consistent with (a balance sheet reduction in) September, but there could’ve been a hope for stronger language or a more clear signal for September. Maybe the market sees September as somewhat of a question mark. We don’t. But relatively soon could be open to some interpretation.

There’s just a lot of momentum in Dollar selling in general. Once the statement was out of the way and didn’t really give any reasons to buy the Dollar, the market tried to push for new highs in some of the other currencies.’

The Fed’s comment was also perceived as dovish by rate hike betters. Bets that the Fed will hike US interest rates a third time before the end of 2017 dropped again on Wednesday, which has weakened the US Dollar.

Euro US Dollar Forecast: German Inflation Could Influence ECB Speculation

There’s still opportunity for the Euro US Dollar exchange rate to see another shift in direction at the end of the week, as a slew of key Eurozone ecostats will be published on Friday.

French Q2 Gross Domestic Product (GDP) projections and July inflation projections will be published first thing, followed by Spanish GDP and inflation projections. Eurozone consumer confidence and business confidence surveys for July will be published slightly later.

Most notably, the afternoon will see the publication of Germany’s July inflation projection too. German inflation is forecast to remain at 0.2% month-on-month and slip from 1.6% to 1.5% year-on-year. If inflation meets expectations, the Euro outlook is unlikely to change much.

However, if inflation falls short, concerns will worsen that the European Central Bank (ECB) may have to extend its quantitative easing (QE) program rather than withdraw it. This could cause EUR USD to fall from its highs towards the end of the week.

Strong German inflation would have the opposite effect and would boost ECB tightening bets.

The US Dollar could be influenced by some notable US data at the end of the week. The Q2 GDP projection and Michigan’s consumer sentiment and inflation surveys could help the US Dollar recover if they impress.

EUR USD Interbank Rate

At the time of writing this article, the Euro US Dollar exchange rate trended in the region of 1.1728. The US Dollar to Euro exchange rate traded at around 0.8525.