Euro US Dollar (EUR/USD) Exchange Rate Climbs amid Hawkish ECB
The Euro US Dollar (EUR/USD) exchange rate is rallying this morning on elevated interest rate hike expectations from the European Central Bank (ECB). Despite a cautious market mood, the US Dollar is struggling to find demand amid easing inflation expectations.
At time of writing, the EUR/USD exchange rate is around $1.0896, a 0.37% slip from this morning’s opening levels.
Euro (EUR) Buoyed by Aggressive ECB Rate Hike Expectations
The Euro (EUR) exchange rate is strengthening this morning in the wake of bullish comments from ECB Governing Council member Olli Rehn. Elevated expectations of prolonged interest rate hikes through winter and spring are buoying the Euro.
Investors are in confident mood this morning after hawkish comments from Rehn over the weekend. Following in the footsteps of ECB President Christine Lagarde, Rehn reiterated the central bank’s desire to bring inflation down to its target rate of 2%. Rehn says there are grounds for ‘significant interest rate increases from the ECB this winter and the coming spring.’
Further bolstering the Euro is the latest poll from Reuters. The market is expecting the ECB to be far more aggressive than initially thought. Expectations of another 50bps rate hike at the next policy meeting, and beyond, could see the single currency soar. The cash rate is expected to peak at 3.25%, the highest since 2008. Silke Tober, economist at Macroeconomic Policy Institute (IMK), commented:
‘The risk is they will actually be as aggressive as they have claimed. Lagarde and others have said they are in for the long haul where we are going to raise rates meeting by meeting in 2023.’
US Dollar (USD) Undermined by Dovish Fed
Meanwhile, the US Dollar is experiencing the adverse problem; the tightening cycle is set to end for the Federal Reserve. US Treasury Secretary Janet Yellen expressed optimism that inflation is coming down, tempering further rate hike expectations.
The softening expectations of further rate hikes seem to be occupying investors’ focus amid a cautious market mood. With a thin trading calendar, combined with the extended holiday period for the lunar new year, the ‘Greenback’ remains quiet ahead.
The same Reuters poll that buoyed the Euro could be pulling the US Dollar down as the Fed is expected to end its tightening cycle. Two further 25bps rate hikes are expected before holding steady for the rest of the year.
Euro US Dollar Exchange Rate Forecast: PMIs to Boost the Euro?
Looking ahead, the Euro US Dollar exchange rate could see further movement with the release of PMI figures for January. An expected improvement for the Eurozone could outpace the forecasted US figures, thus bolstering the single currency.
Meanwhile, US PMI data is expected to show mixed results, with services predicted to improve whilst manufacturing is set to remain in contraction territory.
