Uncertainty about Next Week’s ECB Decision Weighs on Euro to US Dollar Exchange Rate
The Euro to US Dollar exchange rate fell back from its interbank three-year-high of 1.23 on Thursday, trending near the week’s opening level of 1.22. The fall was largely due to market uncertainty about the stance the European Central Bank (ECB) will take in next week’s policy decision.
Last week, December’s ECB meeting minutes were published, hinting that the bank was preparing to adjust its forward guidance language in early 2018.
This caused speculation that the bank was preparing to take a more hawkish stance on monetary policy sooner than expected, boosting Euro (EUR) demand.
However, recent comments from ECB officials have caused uncertainty about the bank’s tone this year.
ECB Vice-President Vitor Constancio said that monetary policy would remain very accommodating and revealed he was concerned about the Euro’s recent rise in value – as was ECB policymaker Ewald Nowotny.
These comments left analysts speculating that the bank was too concerned about Euro strength to take a more hawkish tone on forward guidance, leading to a selloff of the shared currency.
US Dollar (USD) Exchange Rates Lack Drive to Capitalise on Euro (EUR) Weakness
Despite the Euro’s fall on Wednesday, the US Dollar (USD) was unable to pull EUR/USD down very far amid a lack of market appetite for the currency. As a result, the Euro to US Dollar exchange rate remains near the week’s opening levels.
With an improvement in the global growth outlook, markets have come to expect interest rate hikes from multiple central banks over the coming year, meaning there is less general demand for the ‘safe haven’ US Dollar.
On top of this, recent US data has not been particularly notable; at least, not enough to encourage investors to buy the US Dollar.
Wednesday saw the publication of December’s US industrial and manufacturing production results. Industrial production improved in both monthly and yearly prints, but manufacturing slipped year-on-year from 2.5% to 2.4%.
Eurozone Data Fails to Boost Euro (EUR) Demand
Eurozone data published in recent sessions has generally printed within expectations and as a result has had little impact on the Euro to US Dollar (EUR/USD) exchange rate.
Wednesday saw the publication of the Eurozone’s December Consumer Price Index (CPI) results, with all major prints meeting expectations. As expected, inflation slowed year-on-year in December.
Some key data from the Netherlands was published on Thursday but was largely unsurprising too. The Netherland’s unemployment rate remained at 4.4% in December and the trade surplus rose from €4.87b to €6.04b.
Euro to US Dollar (EUR/USD) Forecast: Next Week’s ECB Decision in Focus
A week from today, the European Central Bank (ECB) will hold its January monetary policy decision, which could set the tone for Euro trade over the next month or so.
Since the ECB has already hinted the tone of its forward guidance could evolve in early 2018, markets will be looking for any signs of this in the meeting. If the bank instead maintains its highly cautious outlook, the Euro could weaken.
Anticipation about the decision is likely to weigh on the Euro’s appeal over the coming week, which means EUR/USD is unlikely to hit any new three-year-highs.
EUR/USD could fall further from its recent highs too if US Dollar investors are impressed with upcoming US data.
Friday will see the publication of Michigan University’s consumer sentiment projections for January, but next week’s economic calendar is more likely to be influential.
US data due for publication over the coming week includes Markit’s January PMI projections, home sales stats from December, durable goods orders and Q4 Gross Domestic Product (GDP) projections.
Aside from the ECB policy decision, the Euro could also be influenced by Markit’s Eurozone PMI projections next week.