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EUR/USD Exchange Rate Forecast to Edge Higher on Dovish Yellen

Euro to US Dollar (EUR/USD) Exchange Rate Forecast to Tick Higher ahead of German Consumer Prices Report

The Euro to US Dollar (EUR/USD) exchange rate edged higher by around 0.3% on Wednesday morning.

The Euro declined on Wednesday morning against the majority of its major peers despite comparative US Dollar weakness. Demand for the single currency remains tepid with traders looking ahead to German Consumer Prices data. Inflation in the currency bloc’s most influential nation will need to show signs of rising lest traders speculate towards further stimulus measures undertaken by the European Central Bank (ECB).

Should German inflation fail to show any sign of improvement many analysts predict that the ECB will be even more aggressive with monetary policy. In a bid to avoid cutting to negative rates, some analysts predict that the ECB will be the first major central bank to adopt ‘helicopter money’, a controversial policy aimed at giving cash pay-outs directly to citizens in the hope of boosting consumer spending.

However, Executive Board Member Benoit Coeure dismissed the idea that the ECB would use ‘helicopter money’, stating; ‘To be honest, I don’t see how it could work without some kind of risk-sharing with governments, which could be practically and legally problematic.’ Coeure believes dropping to negative interest rates will be more likely, although he did state that rates will not be taken into ‘absurdly negative territory’.

The Euro to US Dollar (EUR/USD) exchange rate is currently trending in the region of 1.1317.

US Dollar to Euro (USD/EUR) Exchange Rate Forecast to Hold Losses on Reduced Fed Rate Hike Bets

Following a particularly dovish speech from Federal Reserve Chairwoman Janet Yellen, the US Dollar softened versus most of its major peers. Yellen cautioned the need for patience, stating that the external threat from China’s economic slowdown has created a difficult environment in which to tighten monetary policy outlook.

‘The actual US Dollar decline has been more dramatic than we expected,’ explained currency strategists led by Richard Grace at Commonwealth Bank in Sydney. ‘We have subsequently revised lower the extent to which we believe the Fed will lift interest rates both in the short-term and in the long-term.’

Yellen’s speech was in dramatic contrast to recent comments from Federal Reserve officials who stated that domestic data will force the Fed’s hand irrespective of external risks and US Dollar overvaluation.

The Euro to US Dollar (EUR/USD) exchange rate dropped to a low of 1.1284 during Wednesday’s European session.

EUR/USD Exchange Rate Forecast: German Inflation to Boost Volatility

Given the significance of the German inflation report, there is a high chance that the EUR/USD exchange rate will endure heightened volatility upon its release. However, such is the extent of dampened Dollar sentiment following the Yellen speech that the US Dollar is likely to continue holding losses versus its European counterpart.

US economic data is unlikely to be hugely impactful today, especially now that Yellen has indicated that domestic data will take a back seat in determining the timing of a rate hike. With that said, investors will still want to monitor MBA Mortgage Applications and ADP Employment Change reports.

The Euro to US Dollar (EUR/USD) exchange rate reached a high of 1.1333 during Wednesday’s European session.