Fed Inflation Fears Send Euro US Dollar Exchange Rate Higher

The EUR USD exchange rate pushed higher in the wake of the central bank’s September meeting minutes as inflation worries are continuing to stoke division amongst Federal Reserve policymakers.

A number of policymakers expressed concerns that the relative weakness of domestic inflation may not be due to transitory factors, undermining the case for a more aggressive pace of monetary tightening.

However, as the tone of the minutes still supported the prospect of an imminent interest rate hike the resultant softness of the US Dollar was ultimately limited.

EUR USD Benefits from Bullish Eurozone Data

Confidence in the Euro has generally strengthened in recent days thanks to the positive nature of the latest Eurozone data.

The German economy in particular has continued to demonstrate robust signs of growth, with August’s industrial production and trade balance data both strongly bettering forecast.

A strong surge in exports proved especially encouraging to investors as volumes rose 3.1% on the year, suggesting that the Eurozone’s powerhouse economy is continuing to steam ahead without any real signs of slowing.

As Thursday’s Eurozone industrial production data also bettered expectations this offered further support to the EUR USD exchange rate.

US Dollar Gains Likely on Rising Inflationary Pressure

The US Dollar could find a solid rallying point ahead of the weekend, though, if the US consumer price index data for September proves positive.

While this is not the Fed’s preferred measure of inflationary pressure a fresh uptick here could further cement the case for interest rates to rise again before the end of the year.

Any downside disappointment, on the other hand, could undermine the high level of market pricing for an imminent rate hike.

Focus will also fall on the latest advance retail sales and University of Michigan consumer confidence index, with markets hoping to see further signs of domestic strength.

As forecasts point towards a sharp jump of 1.7% in retail sales this may weigh heavily on the EUR USD exchange rate.

Even though market doubts over the Trump administration’s ability to deliver on its much-vaunted tax reform promises persist the political risk for the US Dollar remains relatively low at this juncture.

Catalan Crisis Remains Significant EUR Headwind

Although Catalan president Carles Puigdemont stepped back from a unilateral declaration of independence on Tuesday the crisis is continuing to hang over EUR exchange rates.

As the Spanish government has issued a veiled threat to invoke article 155 of the constitution, allowing it to suspend the regional administration, the threat of an escalation in tensions remains.

Unless both sides show a willingness to enter a constructive dialogue the Catalan crisis is likely to limit the upside potential of the Euro in the coming days.

Without a peaceful resolution this matter could further undermine confidence in the stability of the currency union as well as its ultimate future.

Even so, if the latest commentary from members of the European Central Bank (ECB) proves more optimistic in tone this may boost the EUR USD exchange rate on hopes of a return to a monetary tightening bias.

Luke Trevail

Luke studied Journalism at university but quickly moved into the financial sector, initially working in retail banking before joining TorFX in 2007. As a Senior Account Manager Luke assists in overseeing the management of the company’s exposure to currency volatility. He uses his years of foreign exchange experience to produce regular news updates exploring the latest currency movements.

Contact Luke Trevail