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Future EUR USD Forecast: Turbulence Possible on ECB’s Monetary Policy Plans

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In the wake of better-than-expected Eurozone confidence scores coming out, the Euro has appreciated by 0.3% against the US Dollar. This has led to a EUR USD exchange rate of 1.1789.

The important business confidence figure saw an increase from 1.08 points to 1.34, exceeding the expected 1.11 printing.

(Last updated September 27th, 2017)

With little truly positive news out of the Eurozone today, the Euro has only appreciated marginally against the US Dollar. Having traded at a rate of 1.1736 on Tuesday’s trading session, the Euro has advanced marginally to 1.1739.

As well as the German election result holding back the Euro, the single currency has also been weakened by complications so early on in the coalition formation process.

Not only have the FDP party made it clear that they will expect significant policy changes in exchange for their support, but the CDU’s longtime partners, the CSU, have also tabled their own demands.

Both of these developments have lowered confidence about the coalition process, but as these are early days, the Euro could recover once these initial ‘teething problems’ have been resolved.

(First published September 27th, 2017)

The Euro has lost ground against the US Dollar on Wednesday’s trading session, owing to uncertainty about future European Central Bank (ECB) policy.

On the other side of the pairing, the US Dollar has traded higher owing to growing signs of higher interest rates in the future.

Future Euro Advance Possible if ECB Officials Support Monetary Policy Tightening

If the Euro is going to make steady gains against the US Dollar in the future, it may be dependent on statements from the European Central Bank (ECB).

Headed by President Mario Draghi, the ECB has long been a strong-influencer on the movement of the Euro. Recently, Draghi has stated that;

‘Conditions are very different now. An external change in conditions certainly won’t have the same negative impact it would have had a few years ago

We are becoming more confident that inflation will eventually head to levels in line with our inflation aim, but we also know that a very substantial degree of monetary accommodation is still needed for the upward inflation path to materialise’.

While Draghi’s statement might hint at a Euro-boosting interest rate hike in the near-future, it is worth remembering the ECB’s history of being ultracautious with policy decisions.

In the event that the bank does seem set on a path to continual policy tightening, the Euro could receive continuous support against the US Dollar.

US Dollar Forecast: Future Movement Tied to Odds of December Interest Rate Hike

The US Dollar has recently rallied against the Euro, but could face high turbulence in the coming months.

This is due to continuing uncertainty about whether the US Federal Reserve will decide to raise interest rates for a third time in 2017.

If there were to be a third 2017 rate hike, it would come in December. At present, economists believe there is an over-80% chance of the Fed raising US interest rates during the month.

This sentiment has strengthened in spite of recent comments from Fed Chair Janet Yellen, who has warned that the US jobs market could be weaker than first thought.

In her own words, Yellen has warned that;

‘My colleagues and I may have misjudged the strength of the labour market, the degree to which longer-run inflation expectations are consistent with our inflation objective, or even the fundamental forces driving inflation’.

Maintaining that higher interest rates could still be on the cards, however, Yellen has added that ‘[We] should also be wary of moving too gradually [on higher interest rates]’.

Putting these statements into perspective has been Yukio Ishizuki, a Senior Strategist at Daiwa Securities. Ishizuki has observed that;

‘[Yellen’s] comments suggest that latest (soft) inflation readings do not have a big bearing on the Fed’s monetary policy. The Fed’s focus is not to delay rate hikes too much to avoid a situation where it needs to raise rates hastily in the future’.

If the Fed does seem firmly committed to a December interest rate hike, then the US Dollar could progressively rise against the Euro as the last Fed meeting of 2017 gets closer.

Recent Interbank EUR USD Exchange Rates

At the time of writing, the Euro to US Dollar (EUR USD) exchange rate was trading at 1.1736 and the US Dollar to Euro (USD EUR) exchange rate was trading at 0.8518.

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