Despite news that markets may have misinterpreted European Central Bank (ECB) President Mario Draghi’s speech earlier in the week, the Euro US Dollar exchange rate sustained most of its weekly gains on Wednesday afternoon.
Sources from the ECB reportedly stated that Draghi had only intended to prepare markets for the possibility of stimulus withdrawal being discussed later in the year, without committing to any adjustment. This news caused traders to sell the Euro from its highs.
However, the US Dollar remained weak. Federal Reserve Chairwoman Janet Yellen failed to offer the US Dollar any fresh support as she hesitated to discuss monetary policy in her latest speech. This left Fed rate hike bets lower too.
The Euro outlook is likely to be influenced by Eurozone inflation stats towards the end of the week. If Germany or the Eurozone’s overall June inflation projections come in well below expectations, the Euro US Dollar outlook will worsen.
[Previously updated 16:44 BST 2706/2017]
Tuesday morning’s comments from European Central Bank (ECB) President Mario Draghi supported the Euro throughout the day’s European session.
The Euro US Dollar exchange rate continued to test its best 2017 levels throughout the afternoon. Towards the end of the day, EUR USD briefly rose above the key level of 1.13 for the first time since August 2016.
Demand for the US Dollar improved slightly in the afternoon due to an impressive June US consumer confidence report from CB. The print was expected to slip to 116 but instead rose to 118.9.
Despite this, the US Dollar was unable to hold back a strong Euro. News that the International Monetary Fund (IMF) had cut its US growth forecasts also weighed on USD demand.
[Published 10:19 BST 27/06/2017]
After relatively flat trade last week, the Euro US Dollar exchange rate could be in for a week of gains this week following comments from European Central Bank (ECB) President Mario Draghi on Tuesday. EUR USD began the week trading at around 1.1190, but following Draghi’s comments on the pair jumped to above 1.1240.
Euro (EUR) Outlook Up after Comments from ECB’s Draghi
After largely flat and limp trade for the Euro in recent weeks, the shared currency’s outlook improved on Tuesday morning following the latest comments from European Central Bank (ECB) President Mario Draghi.
Typically the bearer of bad news for Euro traders, Draghi excited markets this time as he told an ECB forum in Portugal that reflationary pressures in the Eurozone were improving. He stated that the bloc’s recovery was strengthening and broadening.
While Draghi noted that inflation was still subdued, he also hinted that the bank was beginning to discuss how to handle the bloc’s strong growth and weak inflation.
Draghi’s talk of being ‘prudent’ in how to unwind the bank’s aggressive stimulus measures hinted to markets that ECB stimulus could be tightened slightly in the foreseeable future.
This was backed up by Draghi’s change of term usage describing the necessary level of stimulus, from ‘a substantial degree’ to ‘a considerable degree’, which has been seen by analysts as a downgrade. Some of Draghi’s statements are as follows;
‘All the signs now point to a strengthening and broadening recovery in the euro area. Deflationary forces have been replaced by reflationary ones
However, a considerable degree of monetary accommodation is still needed for inflation dynamics to become durable and self-sustaining.’
As investors now hope the ECB could slightly wind back its aggressive stimulus measures sooner than expected, the Euro outlook has risen.
This week’s Eurozone data could knock the Euro back from its highs however.
Thursday will see the publication of Germany’s preliminary inflation data from June. Analysts expect it will slip from 1.5% to 1.4%, but if it comes in even worse than expected bets of ECB stimulus tightening may drop as deflation concerns persist.
US Dollar (USD) Limp as Fed Rate Hike Bets Drop
US data published over the last few weeks has disappointed investors and has weighed on market hopes for a third Federal Reserve interest rate hike before the end of 2017.
While the Fed did hike US interest rates for the second time this year earlier in June and has indicated its plan for a third rate hike remains, markets aren’t confident.
Since the most recent US inflation report came in well below expectations, Fed rate hike bets for 2017 have remained below 50% and the US Dollar has seen limp trade. This has made it easier for EUR USD to advance.
So far, this week has seen the publication of the US durable goods orders report from May and the Dallas Fed manufacturing index, which both failed to meet expectations.
Durable goods orders were projected to lighten to -0.6%, but instead slumped to a contraction of -1.1%. The Dallas manufacturing print worsened from 17.2 to 15, below the projected 16.
Fed interest rate hike bets will continue to influence the long-term USD outlook. This week’s Q1 US Gross Domestic Product (GDP) report and Michigan inflation expectations reports could worsen Fed bets if they disappoint too.
EUR USD Interbank Rate
At the time of writing this article, the Euro US Dollar exchange rate trended in the region of 1.1250. The US Dollar to Euro exchange rate traded at around 0.8885.
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