Even though the ECB is not expected to make any changes in policy today the Euro US Dollar exchange rate has nevertheless trended higher.
- US Consumer Price Index strengthened markedly – Rising inflation increased odds of imminent Fed rate hike
- Eurozone current account surplus widened in November – Positive data improved Euro demand
- Dovish ECB policy meeting predicted to dent EUR USD exchange rate – Longer period of accommodative policy likely to dampen investor sentiment
- Political developments to generate US Dollar volatility – Greater clarity over Trump economic policies could shift ‘Greenback’
Ahead of the US inauguration the appeal of the US Dollar has been a little more muted, weighed down by a general increase in risk appetite.
Strong US Inflation Data Boosted Odds of Fed Rate Hike
December’s US Consumer Price Index printed in line with expectations at 2.1% on the year, indicating that inflationary pressure within the world’s largest economy is steadily rising. This was the measure’s strongest performance since mid-2014, boosting expectations that the Federal Reserve will raise interest rates again sooner rather than later. Although this is not the Fed’s preferred measure of inflation it will nevertheless increase the impetus for the central bank to tighten monetary policy further, indicating that the US economy remains in robust health. As a result the Euro US Dollar (EUR USD) exchange rate slipped, particularly as overnight commentary from Fed officials added to the bullish mood.
However, the Euro (EUR) found a rallying point on the back of November’s Eurozone current account figure, which showed that the surplus had widened from 32.6 billion to 40.5 billion. Naturally this stronger showing boosted confidence in the domestic economy, encouraging investors to pile back into the single currency on Thursday morning.
Dovish ECB Meeting Could Dampen EUR USD Exchange Rate Outlook
The appeal of the Euro may well diminish in the face of the European Central Bank’s (ECB) January policy meeting, however. While policymakers are unlikely to make any particular changes at this juncture more dovish commentary from President Mario Draghi could severely dent the single currency. A fresh assertion that the Governing Council has not discussed the possibility of tapering the quantitative easing program would likely put the EUR USD exchange rate on a renewed downtrend, indicating that accommodative monetary policy will be maintained for longer.
Next week’s raft of Eurozone PMIs may offer investors greater encouragement, assuming that growth remains solid. If economic activity across the currency union continues to rise then the EUR USD exchange rate may rally, with positive domestic data boosting confidence in the longer term outlook of the union. Even so, given the increased sense of political risk in Germany, France and Italy the Euro could remain generally biased to the downside for the foreseeable future.
US Dollar (USD) Volatility Expected as Donald Trump Takes Office
Demand for the US Dollar is likely to fluctuate ahead of the inauguration of Donald Trump, given that markets continue to lack any particularly solid details regarding the new administration’s economic plans. Nevertheless, the ‘Greenback’ could experience a fresh uptick if the afternoon’s housing starts and building permits figures point towards a stronger domestic housing market, which would bode well for the wider economy.
The outlook for the US Dollar in the longer term remains rather uncertain, having the potential for further strength but equally vulnerable to weakness if Trump’s policies fail to impress. As analysts at Nomura noted, remarking on the strong uptrend in US economic sentiment surveys;
‘We are about to transition to the time when Trump and the Republicans will be responsible for economic policy. If Trump and the Republican-led Congress do not take quick action, and if the economy does not quickly improve, this surge in confidence may prove to be fleeting.’
Current EUR USD Interbank Exchange Rates
At the time of writing, the Euro US Dollar (EUR USD) exchange rate was trending higher at 1.06, while the US Dollar Euro (USD EUR) pairing was slumped in the region of 0.93.