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Euro to US Dollar Exchange Rate Could Keep Climbing if Eurozone Inflation Improves

Upbeat Hopes for Eurozone Economy Help to Extend Euro to US Dollar Exchange Rate Rally

Last week’s German Consumer Price Index (CPI) data is still making the Euro to US Dollar (EUR/USD) exchange rate an appealing buy. Speculation that Eurozone inflation could beat expectations in 2018 and lead to a more hawkish tone from the European Central Bank (ECB) is keeping investors optimistic.

Germany’s December inflation projections were published on the last Friday of 2017. The year on year inflation rate was expected to slide from 1.8% to 1.5%, but only slipped to a stronger than expected 1.7%.

Similarly, the month on month inflation rate was forecast to come in at 0.5%, but actually rose from 0.3% to 0.6%. Both harmonised inflation projections also beat expectations in December.

The European Central Bank has previously forecast that it expects Eurozone inflation to remain below its 2% forecast until at least 2020, but if inflation continues to beat expectations in the bloc it could lead to more hawkishness from the bank sooner than markets currently expect.

As a result, Euro (EUR) investors are eagerly anticipating Friday’s session, when December inflation projections for the Eurozone will be published.

Thanks partially to the latest German inflation data, as well as weakness in the US Dollar (USD), the Euro to US Dollar exchange rate saw some major gains even in quiet late-2017 trade. The pair climbed from 1.18 to 1.19 last week and on Tuesday morning EUR/USD tested highs of 1.20 for the first time in three years.

US Dollar (USD) Exchange Rates Weak Ahead of Federal Reserve Minutes

The US Dollar has been unappealing to investors in recent weeks and has seen broad weakness against its rival the Euro. The primary reason for US Dollar weakness has been market doubt that the Federal Reserve will maintain a solid pace of US interest rate hikes in 2018.

News that the US Republican Party had passed a set of new US tax laws through Congress was already essentially priced into the US Dollar, despite the currency’s weakness throughout 2018.

Instead, investors are highly anticipating Wednesday’s Federal Reserve meeting minutes report, hoping for more details on why two policymakers voted against a US interest rate hike in December’s meeting.

The Fed’s perceived uncertainty about its 2018 interest rate outlook, as well as recently underwhelming US inflation data, has caused many investors to speculate that the bank will slow down its pace of US interest rate hikes this year.

Euro to US Dollar Forecast: Federal Reserve Minutes and Eurozone Inflation in Focus

Despite being only the first week of 2018, there’s plenty of Eurozone and US data due for publication in the coming sessions that could influence the movement of the Euro to US Dollar (EUR/USD) exchange rate.

Wednesday will see the publication of Germany’s December job market results, including the key unemployment rate which is forecast to remain at 5.6%.

Of course, the latest Federal Reserve meeting minutes report will be published during Wednesday’s American session which could help the US Dollar to recover some of its recent losses if it is not as cautious as feared.

According to Chris Weston, market strategist from IG in Sydney, markets are looking for any signs or data suggesting that inflation will pick up;

‘… The US Dollar is underloved and oversold and it won’t take much to promote a bout of profit-taking from the shorts.’

What’s more, December’s key US Non-Farm Payroll report will be published on Friday and could also give investors an excuse to buy the US Dollar back up from its recent lows.

On the other hand though, with Euro investors already expecting the Eurozone economy to see strong performance in 2018, the Euro could hold against a US Dollar recovery if December’s Eurozone inflation projections beat expectations on Friday.