Euro US Dollar (EUR/USD) Exchange Rate Climbs Despite Rise in US Core Inflation

Euro (EUR) Exchange Rates Surge on Hawkish Shift in ECB Minutes

The Euro US Dollar (EUR/USD) exchange rate climbed on Friday as markets digested the recent release of the European Central Bank’s (ECB) latest policy meeting minutes.

The minutes revealed that the central bank is making preparations to reduce its crisis-era stimulus measures sooner than initially expected, indicating a renewed confidence in the Eurozone’s economic outlook.

This shift in attitude was characterised by a subtle change in the language used, with the word ‘recovery’ swapped with ‘expansion’.

Some analysts have asserted that this is not indicative of an abrupt end to QE, however, with Economist Carsten Brzeski at ING stating:

‘It is unsurprising that the ECB is not ignoring further steps in its tapering (or recalibration) process. Phrases (in the minutes) indicate a further adjustment but in our view no abrupt end. We stick to our previous view that the ECB will not stop QE in September but will rather decide on another ‘lower for longer’ beyond September, probably until the end of the year’.

Nonetheless, the news was successful in bolstering the single currency.

US Core Inflation Accelerates, EUR/USD Exchange Rate Remains Unperturbed

The EUR/USD exchange rate continued trading higher despite the fact that today featured a run of US data releases, including highly anticipated inflation readings and December’s retail sales numbers.

On the inflation front, core consumer prices in the US increased by 1.8% year-on-year in December 2017, up from the previous period’s 1.7% and beating the market expectation that they would remain unchanged.

On a monthly basis, core consumer prices were up 0.3% (the largest gain in 11 months) on the back of rising cost in rent, healthcare and autos.

Retail sales increased, though to a slightly more disappointing extent; only rising 0.4% month-on-month in December (matching market expectations) following an upwardly revised print of 0.9% in November.

Nonetheless, this marked the fourth consecutive month of growth, indicating strong consumer demand throughout the holiday season.

The Euro US Dollar (EUR/USD) exchange rate proved entirely resilient to this news, however, and remained bolstered by the hawkish shift in the ECB minutes.

EUR/USD Exchange Rate Forecast: US Fed Rate Hike Prospects Moving Forward

The Euro US Dollar (EUR/USD) exchange rate could become increasingly volatile in the near-term as markets price in the latest accelerated growth in core US inflation readings.

The US Federal Reserve has been a bit split lately regarding its monetary policy outlook, with some Fed officials deviating from previous plans for three rate hikes in 2018 and others promoting it.

San Franciso Fed President John Williams painted a positive picture of the US economy recently, asserting:

‘We’re in a pretty good situation: the economy is doing great, everyone expects us to raise rates gradually … and if the data changes we can respond to that’.

Chicago Federal Reserve Bank President Charles Evans stated the opposite, however, calling for a pause to rate hikes until mid-2018 whilst also dismissing the notion that inflation will reach the bank’s target range of 2%.

With December’s core consumer prices accelerating, the odds of the Fed sticking with a gradual pace of policy tightening may increase.

Adam Solomon

Adam joined the team at TorFX soon after graduating from University in 2005 with a degree in Journalism. Since then Adam has advanced to become both Head of Trading and Head of Treasury. His keen interest in the currency market and knowledge of what drives exchange rates makes him perfectly positioned to produce regular market updates focused on the movements of the major currencies.

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