Confidence in the Euro remained somewhat muted in the wake of the European Central Bank’s (ECB) June policy meeting.
While policymakers dropped any reference to lower interest rates this was not enough to bolster the single currency for long.
Instead the downward revision of the central bank’s inflation forecasts turned the mood of investors bearish, suggesting that monetary policy is likely to remain loose for the foreseeable future.
Even so, the ECB remains in a delicate situation, as researchers at Rabobank noted:
‘We see a looming risk that over the course of H2 the ECB will be confronted with yet another set of relatively disappointing core inflation and wage data on the one hand, but on the other with increasing pressure to taper QE because technical limits are being reached.’
Fresh signs of strength from the Eurozone were not forthcoming on Friday, however, as the German trade surplus narrowed further than forecast.
A sharp uptick in imports overshadowed a modest rise in export volumes, undermining optimism in the domestic outlook.
Even so, confidence could strengthen over the weekend in response to the first round of voting in the French parliamentary election.
Forecasts point towards a strong showing for President Emmanuel Macron’s En Marche movement, which would bode well for his ability to push forward with his political agenda.
If Macron’s fledgling movement looks set to make significant inroads at its first outing the Euro US Dollar exchange rate could strengthen, with optimism in the future of the Eurozone improving.
Fed Hike Bets Continue to Support US Dollar
The US Dollar largely shrugged off jitters surrounding the testimony of former FBI Director James Comey, with concerns over the stability of the Trump administration fading somewhat.
Although the latest jobless claims figures proved a little underwhelming markets remain confident that the Federal Reserve will raise interest rates next week.
While a rate hike is already largely priced into the ‘Greenback’ this investor conviction limits the upside potential of the EUR USD exchange rate in the short term.
However, in the absence of fresh US data the Euro may find some limited room for gains ahead of Wednesday’s policy decision.
If Fed policymakers prove to be more hawkish in tone at the meeting the US Dollar could extend its recent gains further, with the odds of a more aggressive pace of monetary tightening increasing.
On the other hand, if the rate hike is a dovish one the EUR USD exchange rate could rally as doubts remain over the resilience of the world’s largest economy as well as the Trump administration itself.
Current EUR USD Interbank Exchange Rates
At the time of writing, the Euro US Dollar exchange rate was trending lower at 1.11. Meanwhile, the US Dollar Euro exchange rate was making modest gains around 0.89.