The mood towards the Euro remained relatively muted at the start of the week, even with no change anticipated from the finalised Eurozone consumer price index data.
Even if the data confirms a solid uptick in year-on-year inflation from 1.3% to 1.5% in August this may struggle to bolster the appeal of the single currency.
As European Central Bank (ECB) policymakers have maintained a distinct level of scepticism over the lasting impact of the current uptick in inflation this is unlikely to raise the prospect of any imminent policy tightening.
However, the Euro US Dollar exchange rate could find some support on the back of Tuesday’s ZEW economic sentiment surveys.
If confidence within the German and wider Eurozone economies show signs of recovering somewhat in September this may encourage investors to pile back into the single currency.
On the other hand, any downside disappointment here could further undermine hopes that the ECB will begin to taper its quantitative easing program in the near future.
Comments from ECB President Mario Draghi are also likely to provoke volatility for the EUR USD exchange rate later in the week, with markets keen to gauge the odds of any imminent policy action.
Fed Policy Meeting Outcome to Drive EUR USD Volatility
Confidence in the US Dollar could weaken in anticipation of Wednesday’s Federal Open Market Committee (FOMC) policy meeting, with markets still unsure of the likely outcome.
While some Fed policymakers have expressed greater dovishness in recent days there are signs of an increasing split within the FOMC.
The ultimate balance of the meeting could provoke renewed market jitters if the balance appears to lean more towards the doves at this juncture.
Even so, as analysts at Danske Bank noted:
‘We do not expect major changes to the statement, as it already says the Fed monitors inflation ‘closely’. We are looking forward to hearing Janet Yellen’s view on the dilemma with low inflation and unemployment at the same time.
‘Any dips in EUR/USD will be shallow and short-lived but we emphasise that the speed with which EUR/USD is set to move higher will be reduced going forward.’
Unless the Fed signals that it is likely to raise interest rates again before the end of the year the EUR USD exchange rate looks set to remain biased to the upside.
In the meantime, any weakening of the NAHB housing market index could encourage the US Dollar to soften as the world’s largest economy struggles to demonstrate signs of resilience.
Current EUR USD Interbank Exchange Rates
At the time of writing, the Euro US Dollar exchange rate was trending lower around 1.1931. Meanwhile, the US Dollar Euro exchange rate was making modest gains in the region of 0.8379.