Last week saw highly volatile movement in the EUR USD exchange rate as political uncertainties boosted the US Dollar but poor US inflation stats dragged it lower again.
EUR USD advanced from 1.1774 to 1.1825 last week, but this week the pair has slipped to near the level of 1.1800 again.
Euro (EUR) Investors Await Major Data
The Euro saw no notable shift in movement last week due to a lack of surprising domestic data.
Consumer Price Index (CPI) results from Germany, France, Spain and Italy all met projections in July, indicating that Eurozone inflation is coming along as expected.
As a result, investors remain optimistic that the European Central Bank (ECB) will take a more hawkish tone on monetary policy in the coming months.
Last week, a poll of 50 economists saw that over half of them predict the ECB could make an announcement on quantitative easing (QE) adjustment as soon as September, rather than waiting for October.
If the ECB does announce that it will begin to unwind its QE package in the coming months, the Euro outlook will rise and could help it see further long-term gains against the US Dollar.
However, this week’s Eurozone data has the potential to dampen Euro hawkishness if it disappoints.
Germany’s Q2 Gross Domestic Product (GDP) projections will be published tomorrow, followed by Italy and overall Eurozone projections on Wednesday.
If German growth beats expectations, the Eurozone’s growth outlook overall will have improved and the shared currency could have an easier time sustaining its gains.
If they disappoint though, investors could become concerned that the ECB is more likely to extend its QE program than unwind it.
The same could be said for Thursday’s Eurozone data, which includes key stats like French unemployment and the Eurozone’s final July inflation report.
US Dollar (USD) Outlook Filled with Uncertainties
Last week’s US Dollar strength was largely due to ‘safe haven’ demand, as markets became anxious about rising military rhetoric between the US and North Korea.
As the US Dollar is seen as a ‘safe haven’ currency that is popular in times of global uncertainty, it benefitted from concerns of escalating tensions between the nations.
However, domestic factors remain underwhelming and the US Dollar was sold again at the end of week due to a disappointing US Consumer Price Index (CPI) report.
US inflation was forecast to improve from 1.6% to 1.8% in July, but it instead only reached 1.7%. Monthly inflation was similar, coming in at 0.1% and failing to rise from 0% to 0.2%.
With concerns persisting that US inflation is not recovering as fast as expected, investors are increasingly expecting that the Federal Reserve will leave US interest rates frozen until 2018.
Over 50% of bets expect the Fed to leave rates frozen for the remainder of the year, with a small number of investors even betting the Fed could cut interest rates to tackle slower inflation.
In the coming week, the US Dollar outlook could be influenced by key US data including the latest retail sales and Michigan consumer sentiment reports.
The Fed will also publish its latest meeting minutes this week. If the Fed expands on its recent cautious stance or shows signs of dovishness, the US Dollar could weaken further.
Overall, the US Dollar is likely to continue weakening in the mid to long-term against the Euro, despite EUR USD drops at the beginning of this week.
EUR USD Interbank Rate
At the time of writing this article, the EUR USD exchange rate trended in the region of 1.1802. The US Dollar to Euro exchange rate traded at around 0.8470.
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