Promise of Significant ECB Action Fuels Euro US Dollar (EUR/USD) Exchange Rate Selloff

Prospect of Significant ECB Easing Drives Euro US Dollar (EUR/USD) Exchange Rate Down

Comments from Bank of Finland Governor Olli Rehn drove the Euro to US Dollar (EUR/USD) exchange rate to extend its losses ahead of the weekend.

Coming from a member of the European Central Bank (ECB) governing council Rehn’s dovish commentary prompted the Euro (EUR) to fall sharply across the board as he noted that:

‘It’s important that we come up with a significant and impactful policy package in September.

‘When you’re working with financial markets, it’s often better to overshoot than undershoot, and better to have a very strong package of policy measures than to tinker.’

Rehn’s indication that significant monetary policy loosening is in store encouraged investors to pile out of the single currency as they priced in the prospect of greater ECB action.

Narrowed Trade Surplus Stokes Eurozone Recession Concerns

The mood towards the Euro also soured in response to a sharper-than-expected narrowing of the Eurozone trade surplus.

As the seasonally adjusted trade balance deteriorated from 20.2 billion to 17.9 billion in June, missing forecasts, this left the Euro on the back foot.

With global trade tensions looking set to weigh on growth for some months yet to come investors see little likelihood of Eurozone trade picking back up in the near future.

This weakness also fuelled anxiety over the prospect of a potential Eurozone recession, given the drag that poor trade conditions have already exerted on the German economy.

Weakening Consumer Confidence Forecast to Dent US Dollar

Support for the US Dollar (USD), meanwhile, remained limited in the wake of Thursday’s underwhelming US industrial and manufacturing production figures.

With the world’s largest economy showing signs of slowing in the face of ongoing US-China tensions the upside potential of USD exchange rates proved limited.

Even so, this was not enough to prevent the EUR/USD exchange rate moving lower today.

Demand for the US Dollar could continue to deteriorate during the afternoon, though, if August’s University of Michigan consumer sentiment dips as forecast.

A fresh decline in consumer confidence would raise additional questions over the economic outlook, especially in the face of recent recession speculation.

USD Exchange Rates Set to Benefit from Ongoing Trade Anxiety

If relations between the US and China deteriorate further in the days ahead this could offer a degree of support to USD exchange rates.

While further tariffs could negatively impact US consumers and drag on economic growth the US Dollar could still benefit from a fresh bout of market risk aversion.

As long as investors remain biased towards safe-haven assets this could limit the potential for a EUR/USD exchange rate rally.

Ahead of next week’s release of the latest set of Federal Open Market Committee (FOMC) meeting minutes, though, USD exchange rates may struggle to find much in the way of upward momentum.

Louisa Heath

Contact Louisa Heath