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Euro US Dollar Exchange Rate Vulnerable Despite Increased Dissent Among Fed Policymakers

As the latest German factory orders figures fell short of forecast the mood towards the Euro remained rather muted.

While orders showed a solid rebound on the month – rising 1.0% to reverse much of April’s -2.2% contraction – this was not enough to bolster confidence in the outlook of the Eurozone’s powerhouse economy.

Investors took a more bearish view of the single currency in anticipation of the European Central Bank’s (ECB) June meeting minutes, with policymakers likely to maintain a relatively dovish tone on monetary policy.

However, as analysts at BNPP noted:

‘The June meeting account has been superseded by comments from various ECB members, particularly Draghi’s speech last Tuesday. Hence, the minutes should have a muted impact on the EUR. Communication from ECB speakers looks set to be a case of two steps forwards, one step back.’

If there are no real surprises in the minutes then the Euro US Dollar exchange rate may not see any particular volatility.

Even so, if the minutes reinforce the impression that the ECB is unlikely to taper its quantitative easing program in the coming months then investors are likely to see little particular reason to favour the single currency.

A strong showing from Germany’s industrial production data could still offer the EUR USD exchange rate a rallying point on Friday, though.

US Dollar Upside Limited after Fed Minutes Revealed Disagreement

Confidence in the US Dollar, on the other hand, failed to particularly pick up in the wake of the latest Federal Open Market Committee (FOMC) meeting minutes.

Although the majority of policymakers indicated support for further policy tightening there were signs of growing dissent on the subject of inflation.

Some members of the FOMC warned that the recent slowing in inflationary pressure may not be transitory and could be a signal of greater underlying weakness, undermining the case for tighter monetary policy.

Nevertheless, the odds of another interest rate hike coming before the end of the year remained relatively high as investors expect to see continued signs of strength in the latest raft of labour market data.

Of particular importance will be the average hourly earnings figure, given that weaker wage growth could encourage the Fed to maintain a more cautious approach towards policy tightening.

If the headline non-farm payrolls figure indicates a weakening in labour market strength, though, the EUR USD exchange rate could find a rallying point ahead of the weekend.

As long as markets remain confident in the prospect of another Fed interest rate hike, however, the downside potential of the US Dollar is likely to remain rather limited.

Current EUR USD Interbank Exchange Rates

At the time of writing, the Euro US Dollar exchange rate was trending narrowly around 1.1350. Meanwhile, the US Dollar Euro exchange rate was trapped in a narrow range in the region at 0.8808.