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Could More Hawkish ECB Outlook Encourage Euro US Dollar Exchange Rate Rally?

Coming as no surprise, centrist Emmanuel Macron’s election as the next French president failed to boost the appeal of the Euro for long.

While markets were relieved by the result the victory of the pro-EU candidate was largely priced into the single currency after a fortnight of strong opinion polling.

Thus, after the initial relief rally the Euro US Dollar returned to a weaker footing on Monday morning.

Better-than-expected German factor orders also failed to boost EUR exchange rates, with demand still found to have nearly halved on the year in March.

Even so, European Central Bank (ECB) Executive Board member Yves Mersch noted that the central bank could soon adopt a more optimistic tone on the domestic economy.

If the mood amongst policymakers continues to pick up this could raise expectations for the ECB to return to a tightening bias sooner rather than later.

As Mikael Milhoj, senior analyst at Danske Bank, noted:

‘With euro-area political risks side-lined, focus should return to the fact that Europe is looking surprisingly good cyclically, which will most likely lead the ECB to be somewhat hawkish in terms of communication on policy rates in June, i.e. remove the possibility for rates to go ‘lower’.’

Providing Eurozone data remains strong in the coming weeks then the EUR USD exchange rate could find further underlying support.

However, if ECB President Mario Draghi maintains a more dovish view on monetary policy in comments on Wednesday then the Euro may struggle to find any particular traction against its rivals.

Despite Friday’s somewhat mixed raft of US labour market data the mood towards the US Dollar has picked up.

Markets are now pricing in a nearly one hundred percent chance of the Federal Reserve raising interest rates in June, encouraging investors to pile back into the ‘Greenback’.

Although wage growth is still rather underwhelming the Fed appears on course to continue its monetary tightening cycle, despite lingering worries over the health of the US economy.

Even so, if commentary from members of the Federal Open Market Committee (FOMC) fails to paint an entirely hawkish picture the mood towards the US Dollar could sour once again.

A disappointing showing from April’s consumer price index report may offer the EUR USD exchange rate a rallying point.

However, as the CPI is not the Fed’s preferred measure of inflation a weaker showing here may not be enough to dent the odds of an imminent interest rate hike.

Current EUR USD Interbank Exchange Rates

At the time of writing, the Euro US Dollar exchange rate was on a downtrend around 1.09. Meanwhile, the US Dollar Euro exchange rate was making gains in the region of 0.91.