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EUR/USD Exchange Rate Inches Higher; US Rate Hike off the Table after Inflation Data?

Weak US inflation data has lower the odds of a third interest rate hike from the Federal Reserve this year, enabling the Euro to record strong gains versus the US Dollar.

Despite a lack of impactful data and broad weakness elsewhere, the EUR/USD exchange rate is nonetheless 0.3% higher and trending in the region of 1.1865 at the time of writing.

Euro Rises despite Exchange Rate Weakness Elsewhere on Sparse Economic Data

The Euro has had little to react to in the way of economic news today, with the only release having no real impact upon the long-term EUR outlook.

The only data releases were the finalised German consumer price indices for September, which printed in line with earlier estimates to show month-on-month growth of 0.1% and year-on-year growth of 1.8%.

As the results matched forecasts and initial projections, the figures were not new information and so did nothing to alter the potential trajectory for the Euro in the near-term.

Although the European Central Bank’s (ECB) Yves Mersch appeared at a conference today in Luxembourg, he was mostly interested in crypto currencies and did not shake the outlook on Eurozone monetary policy.

US Dollar Falls, Lifting EUR/USD Exchange Rates, as Inflation Data Disappoints

Some disappointing US inflation data today has soured the odds of an interest rate hike from the Federal Reserve in December.

Markets had priced in strong odds of a third rate hike in the final policy meeting at the end of the year, but below-forecast consumer price growth has seen traders row back somewhat on those expectations.

Month-on-month consumer price growth crept up from 0.4% to 0.5%, instead of rising to the forecast 0.6%, while core price growth slipped unexpectedly from 0.2% to 0.1%.

Year-on-year, consumer prices grew 2.3% in September – up from August’s 1.9% but -0.1% lower than economists had pencilled in. Core price growth also disappointed forecasts by ten basis points, staying steady at 1.7%.

ING Bank Chief International Economist James Knightley still believes that the Federal Reserve is on track to hike rates again in December, stating;

‘With overall economic growth looking good, inflation pressures gradually increasing and the Fed’s worries about asset valuations and financial stability becoming more prominent in speeches, a December rate hike is looking likely. The main risk remains the potential for an economically/market destabilising government shutdown.’

Further adding to the gloom are advance retail sales, which have also dashed predictions by ten basis points, rising from -0.1% to 1.6%.

A much-better-than-expected performance from the preliminary University of Michigan confidence index for October has softened EUR/USD exchange rate gains, however.

The index was expected to dip from 95.1 to 95, but instead leapt to 101.1.

EUR/USD in for Rocky Start to Next Week after Sunday’s Yellen Speech?

Chair of the US Federal Reserve Janet Yellen is set to speak on Sunday afternoon, which means the EUR/USD exchange rate could be in for immediate volatility upon the start of Monday’s trading session.

Should Yellen indicate that she believes inflationary weakness to be temporary, investors are likely to pile back into the US Dollar and increase the odds of a hike in December.

But should the chief US policymaker seem to lean towards the belief that below-target price growth is a sign of systematic weakness, odds of a hike could tumble further, allowing the Euro to make notable gains.

The Euro may find itself in for additional turbulence if Monday’s German wholesale price index and Eurozone trade balance figures improve or worsen the outlook for the Eurozone economy.