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Euro US Dollar Exchange Rate Struggles to Capitalise on Improved Eurozone Confidence

A surprisingly strong uptick in the Eurozone Sentix investor confidence index was not enough to set the Euro US Dollar exchange rate on a bullish trend.

Confidence in the single currency remained muted thanks to the continued belief that the European Central Bank (ECB) will not begin to tighten monetary policy in the near future.

A Reuters poll of economists found that more than three-quarters do not expect the ECB to raise interest rates until 2018 at the earliest.

Even though executive board member Yves Mersch commented that loose monetary policy is ‘a support that cannot go on forever’ this was not enough to raise the odds of any action to come.

Jitters over the fast-approaching French presidential election also weighed on the minds of investors at the start of the week, continuing to limit the upside potential of the Euro.

EUR exchange rates could find a rallying point on the back of April’s ZEW economic sentiment surveys, which may point towards the mood within the currency union picking up in the last month.

Stronger economic confidence would suggest that the health of the Eurozone economy remains robust, even though inflationary pressure has fallen back a little.

On the other hand, any weakness could lead to further selling of the single currency, particularly if the latest industrial production figures also disappoint.

Rising global political tensions have helped to fuel increased demand for the US Dollar, meanwhile.

Escalating rhetoric between the US and Russia drove investors to pile back into safe-haven assets, weighing down the EUR USD exchange rate during Monday’s European session.

However, a sharper-than-expected weakening of the labour market conditions index somewhat limited the appeal of the ‘Greenback’.

Comments from Fed Chair Janet Yellen could encourage the US Dollar to return to a bullish trend, providing that the policymaker takes a more hawkish view on monetary policy.

With markets already pricing in two more interest rate hikes before the end of the year, though, any boost to the US Dollar may prove limited.

As analysts at TDS noted:

‘All attention will be on Fed Chair Yellen’s remarks at the University of Michigan. No official topic has been released and Yellen will be taking questions from the audience and Twitter, though she will likely keep the content and tone of her answers consistent with her press conference in March and the FOMC minutes.’

Friday’s US consumer price index report could put further pressure on the EUR USD exchange rate, if the data continues to demonstrate the resilience of the domestic economy.

While the CPI is not the Fed’s favoured measure of inflation a solid showing would still offer some encouragement to policymakers, particularly if earnings figures also show some improvement.

Any further increase in geopolitical tensions could see the Euro ceding more ground to the US Dollar.

Current EUR USD Interbank Exchange Rates

At the time of writing, the Euro US Dollar exchange rate was trending narrowly at 1.06. Meanwhile, the US Dollar Euro exchange rate was trending lower at 0.94.