Euro to US Dollar (EUR/USD) Exchange Rate Rises despite European Central Bank Jitters
Market anxiety about the possibility that the European Central Bank (ECB) could take a more dovish tone in its policy decision tomorrow hasn’t prevented the Euro to US Dollar (EUR/USD) exchange rate from sustaining gains this week.
Since opening at the level of $1.11, EUR/USD has advanced over half a cent and has sustained most of the week’s gains. At the time of writing this morning, the EUR/USD exchange rate is trending closely to its best levels since mid-April.
The primary cause of EUR/USD gains has been broader weakness in the US Dollar (USD) on Federal Reserve interest rate cut bets. This has made it easier for the Euro (EUR) to advance despite concerns about the ECB outlook.
Demand for the US Dollar has been poor in recent sessions, but fresh comments from Fed officials have only made investors more hesitant to hold the US currency.
Euro (EUR) Exchange Rates Hold Gains as Eurozone PMIs Beat Expectations
Euro (EUR) exchange rates have managed to hold gains despite this week’s mixed Eurozone data, with some key prints falling short of expectations and making investors more anxious that the European Central Bank (ECB) will be under pressure to leave interest rates at record lows for much longer than expected.
Of particular note was yesterday’s Eurozone inflation report, which was generally disappointing and indicated that Eurozone inflation was not as resilient as hoped.
Analysts reacted to the data by suggesting ECB interest rates may not rise at all until 2021.
However, this morning’s Eurozone services and composite PMI results from May surprised investors by beating projections.
Despite disappointing manufacturing stats earlier in the week, the services sector performed better than projected in Germany and the Eurozone overall, pulling the Eurozone’s overall composite PMI to a better than expected 51.8.
US Dollar (USD) Exchange Rates Slump as Federal Reserve Interest Rate Cut Expectations Rise
Today’s Eurozone data helped the Euro (EUR) hold onto gains against a weaker US Dollar (USD), which had been held down by rising market expectations that the Federal Reserve will have to cut interest rates at some point over the next year.
Signs of weakness in inflation, as well as some recent disappointing ecostats and ongoing trade protectionism, have made investors concerned that the US economy could soon be in for a slowdown.
These factors led to bets that the Federal Reserve will cut US interest rates, and rate cut bets have only deepened following comments from Federal Reserve officials.
Federal Reserve Chair Jerome Powell held a speech yesterday, in which he said the bank would ‘act as appropriate’ in response to shifts in US economic strength.
His comment indicated that the bank was willing to consider interest rate cuts, which it had not previously been considering. This dovish signal sent US Dollar (USD) exchange rates tumbling overnight.
Euro to US Dollar (EUR/USD) Exchange Rate Investors Anticipate European Central Bank (ECB)
A range of influential Eurozone and US data are still due to be published before the week is out, but the biggest focus for Euro (EUR) and US Dollar (USD) investors will be tomorrow’s European Central Bank (ECB) policy decision.
While some stats, including Eurozone unemployment and services, have come in slightly above expectations, market hopes for a solid economic rebound from the Eurozone’s recent slowdown have faded.
Investors will be closely watching for the bank’s reactions to the recent weakness in Eurozone inflation. If the bank takes a more dovish than expected tone on the monetary policy outlook, EUR/USD could shed some of its recent gains.
On the other hand, a steady or optimistic tone from the ECB will make it easier for EUR/USD to hold most of this week’s gains.
The US Dollar is more likely to react to data which could further influence Federal Reserve interest rate cut bets.
Eurozone growth data and US trade data tomorrow, followed by German trade data and US Non-Farm Payroll data on Friday, are the datasets most likely to influence the Euro to US Dollar (EUR/USD) exchange rate.