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Euro to US Dollar Exchange Rate Tests Three-Year-Highs Despite European Central Bank (ECB) Uncertainty

Euro to US Dollar Exchange Rate High Despite Concerns of ECB Maintaining Caution

The Euro to US Dollar (EUR/USD) exchange rate has been unable to sustain many fresh gains this week due to market uncertainty about what tone the European Central Bank (ECB) will take in next week’s January policy decision.

Despite this though, EUR/USD is still trending very closely to its best levels in over three years. The pair touched on a high of 1.2306 on Tuesday night, its best level since December 2014. The pair currently trends near the level of 1.2235.

Market concern that the European Central Bank (ECB) may not take a more hawkish tone towards monetary policy as soon as speculated has limited the Euro’s (EUR) strength in recent sessions.

The Euro jumped last week in response to seemingly hawkish hints in the ECB’s December meeting minutes report, but since then ECB Vice President Vítor Constâncio has expressed caution.

He stated he was ‘concerned about sudden movements [in the Euro] which don’t reflect changes in fundamentals’. To some investors this hinted that the bank may delay any potential hawkish shifts in order to keep the Euro from surging too high.

US Dollar (USD) Exchange Rates Weighed by Rising Global Growth Outlook

The US Dollar (USD) has remained unappealing for investors in recent sessions, despite last week’s data indicating that US core inflation was slightly better than expected in December.

Recent weakness in the US Dollar has been largely due to global factors. For example, the global growth outlook for 2018 is looking up with many major central banks besides the Federal Reserve now expected to hike interest rates this year.

Essentially, investors are bearish on the US Dollar amid expectations that its popularity as a ‘safe haven’ currency during global economic uncertainty is waning.

With even the European Central Bank (ECB) speculated to be tightening or even unwinding its aggressive stimulus package sometime this year, the Euro has become much more appealing versus the US Dollar.

On top of this, US Dollar investors are also concerned that the Federal Reserve could still slow the pace of its US interest rate hikes this year.

Euro (EUR) Fails to Benefit from Eurozone Inflation Results

As was projected in the first week of January, the Eurozone consumer price rate slowed in December, confirmed by the bloc’s latest Consumer Price Index (CPI) report on Wednesday.

Eurozone inflation slowed from 1.5% to 1.4% year-on-year in December, while the core yearly inflation rate remained at 0.9%. Both of these figures met projections.

December’s month-on-month inflation rate rose from 0.1% to 0.4% as a consensus of analysts expected.

The data indicated that price pressures in the Eurozone remained subdued as the European Central Bank (ECB) had forecast.

This, as well as the tone of caution from some ECB officials, has limited the Euro’s strength and prevented it from holding its best levels against the US Dollar.

Euro to US Dollar (EUR/USD) Forecast: Narrow Trade Could Continue

The Euro to US Dollar (EUR/USD) exchange rate may remain range-bound in the coming sessions amid a lack of key data due before the end of the week.

It’s likely that high market anticipation for next week’s European Central Bank (ECB) policy decision will also limit movement, as investors will be hesitant to adjust positions on the Euro until then.

Trade balance data for November from The Netherlands will be published on Thursday, followed by Spanish trade data on Friday.

As for US data, December housing stats and the latest jobless claims data will be published on Thursday while Michigan’s January consumer sentiment survey will come in on Friday.

While these datasets could influence the Euro to US Dollar (EUR/USD) exchange rate slightly, investors are more likely to react to notable political news or wait for next week’s busier economic calendar.

Aside from the European Central Bank meeting on the 25th, next week will also see Eurozone PMI projections from January as well as US Gross Domestic Product (GDP) results from Q4.