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EUR/USD Exchange Rate Edges Lower as Markets Hold Their Breath for Draghi

Update, 12/10/2017; Despite strong industrial production figures from the Eurozone, the EUR/USD exchange rate has begun to cede ground. Industrial production was expectated to grow 0.6% in August, but instead growth accelerated to 1.4%. On the year, output increased by 3.8%, beating forecasts of a slowdown to 2.6%.

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The Euro is holding above opening levels versus the US Dollar this morning after last night’s US Federal Open Market Committee (FOMC) meeting minutes failed to particularly excite investors.

The EUR/USD exchange rate is currently trending at around 1.1869; less than 35 pips higher than its starting position.

Despite the US Dollar decline, the presence of key developments on the Eurozone economic data calendar today are preventing the common currency from capitalising on the ‘greenback’s weakness.

Euro Flat against the US Dollar ahead of Draghi Speech

European Central Bank (ECB) President Mario Draghi is set to participate in a panel event in Washington later this afternoon.

Markets are currently expecting that the next meeting of the Governing Council will result in policymakers discussing and announcing plans to taper the vast quantitative easing programme, which would pave the way for higher interest rates in the medium to long term.

Draghi’s comments at today’s event will therefore give an insight into how the head Eurozone policymaker views adjustments to the current stimulus package.

Should Draghi focus on the benefits of quantitative easing – presuming he has asked to comment on the issue – and seem to be defending the ECB’s asset purchasing programme, markets may interpret this as a sign that the President is not yet ready to start unwinding the plans.

Should Draghi sound upbeat on the health of the Eurozone economy, however, it is likely that traders will continue to expect some form of policy normalisation as a result of this month’s meeting.

With the balance of risks equally in favour of the upside and the downside, markets are therefore wary of committing themselves to Euro positions until Draghi’s comments can be analysed and the likelihood of EUR moving in either direction assessed.

It also seems that yesterday’s market relief following the suspension of Catalonia’s independence from Spain has abated, as the Spanish government refuses to rule out taking direct control of the region using constitutional powers should the Catalonian Parliament attempt secession.

US Dollar Softens as FOMC Minutes See Traders Easing Back on Hike Bets

Although the latest minutes from the Federal Open Market Committee (FOMC) remained upbeat overall, their release has led to a notable decline in market bets of an interest rate hike in December.

Odds of a hike have now slipped back to 81.7%, according to the Fed Funds futures market, although the consensus amongst policymakers still seems to be another round of tightening will be delivered before the end of the year.

However, as has happened before when Fed rate hike seems almost certain, investors are looking past near term policy adjustments to focus on the longer term trajectory for interest rates.

It was here that markets were perturbed by the minutes, as they indicate that the Fed remains divided on whether the current weakness in inflation is transitory or symptomatic more long-term issues.

Because the potential for a December rate hike is already priced very strongly into the US Dollar, the “Greenback” is now reacting to expectations of monetary tightening in 2018, so falling odds that the current normalisation cycle will continue is weighing on the currency.

EUR/USD Exchange Rate Forecast to Remain Flat Ahead of Draghi Panel Appearance

Although there is Eurozone data set for release shortly, this is unlikely to overly impact the trajectory of the EUR/USD exchange rate, given that the far more impactful public appearance by Mario Draghi follows in a few hours.

Eurozone industrial production growth is expected to have accelerated from 0.1% to 0.6% during August, although year-on-year production output growth is expected to slow from 3.2% to 2.6%.

There are a handful of events on the US economic calendar today that could either enhance the gloom surrounding the US Dollar or help to somewhat dispel it.

Initial and continuing jobless claims figures may help improve the outlook upon inflation if they show a reduced number of people filing for out of work benefits.

Later, Federal Reserve officials Jerome Powell and Lael Brainard will make public appearances.