Euro US Dollar (EUR/USD) Exchange Rate Accelerates Ahead of ECB Stimulus Debate

June 14, 2018 – Written by John Cameron

The Euro US Dollar (EUR USD) exchange rate continues to press higher this morning as investors await the conclusion of the European Central Bank’s (ECB) latest policy meeting.

Euro (EUR) Appreciates as ECB Stimulus Debate in Spotlight

The Euro (EUR) continues to trend higher against the US Dollar (USD) this morning as markets brace for the potential of the European Central Bank calling time on its extensive quantitative easing programme.

While nothing is set in stone, there has been considerable speculation in recent weeks that today’s meeting could see ECB policymakers finally begin discussing how the bank will exit from its stimulus programme.

With central banks around the world now looking to tighten policy, there are growing expectations that the ECB will now have to begin following suite, starting with the winding down of its QE programme.

An announcement today that the ECB is moving towards winding down its bond purchases is likely to see the Euro skyrocket.

Doubly so if the timetable suggests this would take place by the end of 2018, paving the way for a possible rate hike in 2018.

However the bank’s decision may not be as straight-forward as some might think. Recent economic data indicates the Eurozone economy is slowing this year and policymakers will likely be wary about threatening the bloc’s road to recovery.

There are also likely to be concerns about the recent rise in geopolitical uncertainty, with Italy’s new populist government and ongoing US trade tensions possibly denting the outlook from policymakers.

Carsten Brezski, Chief Economist at ING Germany said:

‘Despite growing uncertainty around the strength of the Eurozone recovery, little underlying inflationary pressure and possible further market turmoil, the European Central Bank seems determined to focus on long-term trends.

We still don’t think the central bank will easily give away flexibility and room for manoeuvre on quantitative easing in a situation where downside risks to the economic outlook have increased and political risks could easily re-emerge.’

Fed Rate Hike Fails to Support US Dollar (USD)

Meanwhile the US Dollar has slipped back today, despite the Federal Reserve striking a slightly more hawkish tone in its policy statement yesterday.

In a move that came as no surprise to markets, the Fed also delivered its second rate hike of the year on Wednesday, with the hike failing to impact the US Dollar after being priced in months in advance.

Even signals from the bank that it would now target four rate hikes in 2018 did nothing to support the ‘Greenback’, with markets appearing taking it as aa given following a run of solid US data in recent weeks.

Stefan Kreuzkamp, chief investment officer at Deutche Bank said:

‘In an increasingly uncertain world, US monetary policy remains reassuringly boring. Policymakers painted a generally upbeat picture of the US economy’s prospects. Despite ongoing trade frictions, both we and the Fed expect (US) growth to persist above trend at least through next year.’

In fact the US Dollar appeared to fall victim to a bout of profit taking, with traders looking to reposition their investments ahead of today’s ECB meeting.

EUR/USD Exchange Rate Forecast: US Retail Sales to Strengthen the US Dollar?

Looking past the ECB’s policy meeting, the EUR/USD exchange rate could also be moved this afternoon by the publication of the latest US retail sales figures.

Economists forecast today’s data will reveal US retail sales growth ticked higher in May, possibly lending some support to the US Dollar and allowing it to recoup some of its recent losses.

Meanwhile the Eurozone’s final inflation reading for the month of May will be published on Friday, with the Euro likely to shore up its position if Inflation is shown to have risen in line with forecasts.

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TAGS: Euro Forecasts