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Speculation Over ECB and Fed Policy Outlooks Encourage Euro US Dollar Exchange Rate Jitters

Demand for the Euro picked up once again as Germany’s manufacturing and services PMIs bettered expectations to demonstrate continued solid growth in August.

This encouraged investors to buy back into the single currency on Thursday morning, even as the latest speech from European Central Bank (ECB) President Mario Draghi failed to galvanise markets.

These latest signs of strength from the Eurozone’s powerhouse economy are unlikely to keep EUR exchange rates on a stronger footing for long, however.

With the French service sector unexpectedly faltering in the last month there are lingering concerns over the underlying economic health of the currency union.

Further volatility could be in store for the Euro US Dollar exchange rate ahead of the weekend, as markets look increasingly jittery in anticipation of the Jackson Hole symposium.

Even though ECB insiders have reported that Draghi does not intend to make any comments on monetary policy at the summit this is unlikely to prevent market speculation.

If investors fail to see any signs of increased hawkishness from Draghi this could leave the Euro vulnerable to a sharp downtrend ahead of the weekend.

On the other hand, if there is even the slightest positive mention of tapering the quantitative easing program the EUR USD exchange rate could return to a bullish run.

US Dollar Rally Forecast if Fed Signals Greater Hawkishness

Mounting doubts over the Trump administration has left the US Dollar with limited support this week, particularly as the latest domestic data has proven rather mixed in nature.

As markets are increasingly doubtful that Trump will deliver on his much talked-up infrastructure investment and tax reform promises the appeal of the ‘Greenback’ has faded.

However, while the odds of the Federal Reserve achieving a third interest rate hike before the end of the year have diminished the US Dollar could find a boost on the back of comments from Fed Chair Janet Yellen.

There are hopes that Yellen may offer some fresh guidance over the current outlook of the Fed, which may put significant downside pressure on the EUR USD exchange rate if her tone appears to lean towards hawkishness.

Even so, as James Smith, economist at ING, noted:

‘The return of inflation to target is likely to take time. This means the Fed will be keen not to commit to anything in the near-term – and markets will remain sceptical about the prospects for future rate hikes until they do.

‘With Chair Yellen likely to steer well clear of policy hints at Jackson Hole, the next big insight into the Fed’s thinking will come with the update of the Fed’s infamous dot plot – a graph of individual member’s rate hike expectations – in September.’

As long as Fed policymakers continue to show signs of division over the timing of the next interest rate hike this is likely to limit the upside potential of the US Dollar.

Current EUR USD Interbank Exchange Rates

At the time of writing, the Euro US Dollar exchange rate was making gains in the region of 1.1787. Meanwhile, the US Dollar Euro exchange rate was slumped around 0.8481.