Euro to US Dollar (EUR/USD) Exchange Rate Forecast: Faltering German Economic Confidence Dents EUR

Update: Lower Eurozone Consumer Confidence Forecast to Limit Euro Exchange Rate Potential

The bearishness of the Euro to US Dollar (EUR/USD) exchange rate is forecast to ease ahead of tomorrow’s Federal Reserve interest rate decision, with markets bracing for the outcome of the meeting.

Even though underlying support for the Euro (EUR) remains rather limited at this juncture the potential for further losses looks somewhat muted.

If this afternoon’s finalised Eurozone consumer confidence index for March confirms a dip in domestic sentiment, though, the EUR/USD exchange rate may struggle to shake off its bearish momentum.

Weaker German Producer Prices Weigh on Euro US Dollar Exchange Rate

A fresh slowing in the German producer price index has left the Euro to US Dollar (EUR/USD) exchange rate on a softer footing.

As the index dipped to just 0.1% on the month this suggests that price pressures within the Eurozone’s powerhouse economy are still failing to build as hoped.

This somewhat undermined the positive impact of recent comments from European Central Bank (ECB) policymakers, who had sounded a more optimistic note on the inflationary outlook.

The Euro (EUR) also came under pressure in response to a decline in March’s ZEW economic sentiment surveys, with the German expectations index plunging from 17.8 to 5.1.

All in all, this does not paint the most encouraging picture of the German domestic outlook, even now that the political situation has stabilised.

EUR/USD Exchange Rate Forecast to See Limited Impact from Much-Anticipated Fed Interest Rate Hike

Reaction to the Federal Reserve’s March policy decision is likely to be relatively muted, limiting the potential for EUR/USD exchange rate volatility, even if interest rates rise in line with market forecasts.

As investors have already largely priced in the impact of an imminent rate hike the US Dollar is unlikely to see any particular gains on the back of the announcement.

However, markets are still keen to gauge the likely path of monetary policy over the course of 2018.

If policymakers indicate a willingness to maintain a faster pace of monetary tightening in the coming months, paving the way for as many as three more rate hikes in 2018, this could weigh heavily on the EUR/USD exchange rate.

On the other hand, any signs of caution in response to the increasingly protectionist approach of the Trump administration may see the US Dollar fall further out of favour.

Focus will also fall on Friday’s durable goods orders figure, which is forecast to show a solid rebound in February after starting the year with a sharp contraction.

Optimistic ECB Bulletin Forecast to Support Euro Exchange Rates

The release of the latest ECB Economic Bulletin could offer the EUR/USD exchange rate a rallying point on Thursday.

Given the more optimistic nature of recent ECB policymaker commentary, markets are hoping to see further signs that the central bank is shifting towards a less dovish bias, albeit at a rather slow pace.

Any indications that the ECB is discussing further policy normalisation could see the Euro pushing higher once again, even though the prospect of any imminent action is decidedly limited.

March’s raft of Eurozone manufacturing and services PMIs may put some degree of pressure on EUR exchange rates, with economic activity forecast to have lost some momentum on the month.

While the PMIs are expected to remain firmly within expansion territory any easing in activity could still discourage investors, in the short term at least.

Hannah Wilson

Contact Hannah Wilson