Euro US Dollar (EUR/USD) Exchange Rate Slumps on Dovish ECB Hike
The Euro US Dollar (EUR/USD) exchange rate trended sideways before crashing on Thursday as the European Central Bank (ECB) refused to commit to a path of further monetary policy tightening. Meanwhile, unexpectedly high GDP growth in the US buoyed the US Dollar (USD) against its peers.
At the time of writing, EUR/USD is trading at $1.1014, having plummeted by almost a full percentage point over the course of the week.
Euro (EUR) Weakens as Lagarde Omits Forward Guidance
The Euro (EUR) traded broadly lower against the majority of its peers last week, depressed by a dovish commentary from the ECB on Thursday.
Ahead of the monetary policy statement, the single currency was subdued on account of weak data from Germany – the bloc’s largest economy. Monday’s manufacturing and services PMIs disappointed and subsequently, the Ifo business climate indicator printed below expectations.
As the ECB’s policy decision rolled around on Thursday, investors were unsure what to expect. Recent signals that inflation had begun to ease caused some to anticipate a more dovish tone; nevertheless, the central bank’s refusal to commit to further monetary policy tightening still led to a drop in Euro exchange rates.
ECB President Christine Lagarde told investors: ‘We will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction.’
Following the bank’s 25bps rate hike and dovish commentary, EUR was unable to recoup its losses, but made small gains against the US Dollar on Friday as the ‘Greenback’ experienced some volatility.
US Dollar (USD) Climbs on GDP Tailwinds
The US Dollar traded in a mixed range last week as the Federal Reserve was noncommittal in its forward guidance and the PCE price index subsequently weakened. On Thursday, however, the currency enjoyed tailwinds on account of a better-than-expected GDP release.
As with the European Central Bank, the Fed gave a dovish statement on Wednesday evening. Chairman Jerome Powell suggested any further tightening of monetary policy would be data dependent, failing to reiterate previous comments that policymakers expect to deliver two more rate hikes this year.
‘We have to be ready to follow the data, and given how far we’ve come, we can afford to be a little patient, as well as resolute,’ said the central bank chief.
Nevertheless, a better-than-expected GDP release on Thursday suggested the US economy may be more capable of weathering further policy tightening than initially thought. Data for Q2 2023 printed at 2.4% rather than the 1.8% expected.
At the end of the week, the US Dollar weakened against several of its peers as the core PCE price index – the Fed’s preferred measure of inflation – showed that price pressures had eased. While expected, the data still inspired USD headwinds as it indicated that hawkish monetary policy may not be necessary.
EUR/USD Forecast: Full Docket Suggests Movement Ahead
The Euro US Dollar exchange rate could trade in a wide range this week, given the multitude of significant data releases from both the Eurozone and the US.
At the start of the week, German sales growth may boost the Euro, alongside economic expansion in the bloc; gains may be capped, however, by reports of easing inflation.
German employment could then influence EUR trading, followed by the release of the US ISM manufacturing PMI. If activity increased in July, the ‘Greenback’ may climb.
Later in the week, the ISM services PMI is expected to reveal a slower rate of expansion, potentially denting USD morale. EUR/USD may nevertheless face losses on Friday, if German factory orders weaken as expected.