The Euro suffered a sharp plunge on Wednesday morning after reports emerged that the European Central Bank (ECB) is preparing to cut its inflation forecasts.
This naturally spooked investors, reducing the likelihood of the central bank returning to a monetary tightening bias in the foreseeable future.
While the Eurozone consumer price index has pointed towards a progressive uptick in inflationary pressure in recent months ECB policymakers have remained notably unconvinced.
Even though the currency union has demonstrated signs of strength in its first quarter gross domestic product figures and other domestic data, this is unlikely to be enough to prompt any sense of greater ECB hawkishness.
As analysts at Danske Bank noted:
‘There is still no evidence of a rise in the underlying price pressure, and with the oil price having been a significant contributor to inflation at the beginning of the year, headline inflation will approach 1.0% in early 2018.
‘We expect the ECB to continue its QE purchases going into next year and keep policy rates unchanged at least until 2019, which is longer than what is currently priced in the market.’
If President Mario Draghi takes a less optimistic view on monetary policy this could prompt the Euro US Dollar exchange rate to cede further ground, with the prospect of any imminent tapering of the quantitative easing program diminishing.
However, the Euro could find some cause for confidence if April’s German industrial production and trade balance figures prove positive.
Comey Testimony Set to Increase US Dollar Volatility
Confidence in the US Dollar, on the other hand, was somewhat muted in anticipation of former FBI Director James Comey’s testimony to the Senate Intelligence Committee.
There are concerns that evidence from Comey could reignite the political scandal surrounding the Trump administration, putting renewed pressure on the White House and the ‘Greenback’ by extension.
Increased doubts over the ability of the Trump administration to deliver on its promised infrastructure spending and fiscal reforms may offer support to the EUR USD exchange rate.
Although an imminent Federal Reserve interest rate hike is still being priced as a near-certainty the US Dollar could weaken if the central bank looks set to pursue a less aggressive pace of monetary tightening in coming months.
Disappointing domestic data has undermined confidence in the resilience of the world’s largest economy, something which an increased sense of political turmoil would only exacerbate.
Even so, if the latest jobless claims data points towards greater strength within the labour market the mood towards the US Dollar could improve.
Current EUR USD Interbank Exchange Rates
At the time of writing, the Euro US Dollar exchange rate was trending lower at 1.1264. Meanwhile, the US Dollar Euro exchange rate was making modest gains in the region of 0.8875.