- Negative Eurozone inflation softened Euro – Weak inflationary outlook raised concerns of imminent ECB easing
- Hawkish Fed commentary boosted US Dollar – Odds of June interest rate hike jumped sharply
- EUR/USD exchange rate volatile on ECB minutes – Markets reassured by decreased policymaker dovishness
- Weaker US manufacturing data ended ‘Greenback’ gains – Discouraging US data dented likelihood of imminent rate rise
Less Dovish ECB Meeting Minutes Boosted Euro (EUR) Exchange Rate
A weaker-than-expected Philadelphia Fed Index weakened the appeal of the US Dollar (USD) towards the end of Thursday’s European session, as the domestic manufacturing sector continued to show signs of weakness. This dented the odds of an imminent interest rate move from the Fed, ending the ‘Greenback’s bullish run. The Euro (EUR), meanwhile, received a boost from the European Central Bank’s (ECB) meeting minutes as policymakers were shown to be less inclined to ease policy in the near future. With the ECB in ‘wait and see’ mode markets were generally encouraged, as policy divergence seemed less likely. As a result the Euro to US Dollar (EUR/USD) exchange rate was trending narrowly in the region of 1.1214 on Friday morning.
Euro (EUR) Faltered as Weak Eurozone Inflation Increased Odds of ECB Easing
While the finalised Eurozone Consumer Price Index for April yielded no surprises, this was not enough to particularly reassure the Euro (EUR). As domestic inflation was confirmed to have dropped to -0.2% in April, markets remained concerned with the possibility of the European Central Bank (ECB) opting to introduce further monetary loosening measures in the near future. Some of this dovishness was countered by news that the European Commission had decided to extend the deadlines for Spain and Portugal to bring their deficits in line with the mandated 3% target. As both nations are experiencing heightened states of political tension, this move was something of a relief.
Hawkish commentary from members of the Federal Open Market Committee (FOMC) helped to bolster the US Dollar (USD), meanwhile. Atlanta Federal Reserve President Dennis Lockhart indicated a belief that markets were underestimating the possibility of the Fed moving on interest rates in June. As this followed on from a relatively strong US inflation report, which showed that annual inflation was just above the central bank’s 2% target, demand for the ‘Greenback’ strengthened bullishly.
Hawkish Fed Minutes Pushed EUR/USD Exchange Rate to Two-Month Low
The Euro to US Dollar (EUR/USD) exchange rate slumped sharply overnight due to the release of the FOMC’s May meeting minutes. A number of policymakers were shown to be considering an imminent interest rate hike, in contrast to the rather more dovish rhetoric that investors were largely anticipating. As a result the EUR/USD pairing was pushed to a two-month low of 1.1207, with the likelihood of continued policy divergence between the ECB and Fed seeming a greater possibility. Lee Hardman, currency analyst with MUFG, highlighted the shock of this more hawkish message, commenting:
‘We have been expecting the Fed to resume rate hikes in either July or September and viewed the June meeting as likely too soon especially as it falls just before the EU referendum in the UK. There is now clearly a high risk that the next rate hike is delivered in June. Some participants noted concern over Brexit risk in the minutes but it did not appear likely to be a significant impediment to a rate hike in June.’
Although the French Unemployment Rate showed some improvement in the first quarter, clocking in at 10.2% rather than 10.3%, markets continued to lack sufficient incentive to buy back into the single currency. With concerns increasing over the likelihood of a successful conclusion of the Greek bailout review and the possibility of further ECB easing to come, there was little reason to favour the Euro on Thursday morning.
EUR/USD Exchange Rate Forecast: ECB, Fed Commentary to Remain Primary Influence
Should the latest ECB meeting minutes point towards the possibility of additional monetary loosening measures in June or July the EUR/USD exchange rate is expected to weaken further. Greater dissention amongst policymakers could offer markets some hope, however, as more vocal hawkish opposition could deter the central bank from moving too soon. If the current program of easing measures are assessed to be working then optimism could help to drive the common currency higher against rivals.
Markets will be closely watching speeches from Fed policymakers Stanley Fischer and William Dudley, who tend to be considered among the more influential members of the FOMC. Should the pair reinforce expectations of an imminent rate hike then the US Dollar could extend its bullish run, although more measured commentary may undermine the currency’s strength. A less-than-impressive Philadelphia Fed Index may also put an end to the ‘Greenback’s recent rally.
Current EUR, USD Exchange Rates
At the time of writing, the Euro to US Dollar (EUR/USD) exchange rate was trending narrowly at 1.1220, while the US Dollar to Euro (USD/EUR) pairing was also experiencing limited movement around 0.8911.