Euro US Dollar (EUR/USD) Exchange Rate Fluctuates ahead of Volatile Afternoon
The Euro US Dollar (EUR/USD) exchange rate is trading narrowly as the markets remain subdued ahead of crucial US inflation data.
At time of writing, the EUR/USD exchange rate is around $1.0924, relatively unchanged from this morning’s opening levels.
US Dollar (USD) Quiet as Investors Move to Sidelines
The US Dollar is relatively quiet this morning as the market braces for a volatile afternoon of US data. The latest annualised headline CPI expected to soften from 6% to 5.2%. Therefore, the Federal Reserve could be on the verge of a pause in the tightening cycle.
The probability of another 25bps interest rate hike sits at 80%, investors are reluctant to place their bets. However, despite annualised inflation continuing to soften, core inflation could remain sticky. If core consumer price inflation, excluding volatile items such as food and energy, climbs back up as expected, the Fed could be forced to delay their pause. The ‘Greenback’ could surge on renewed rate hike bets.
At present, the CME Group FedWatch Tool are pricing in a 67% probability of one more rate hike of 25bps from the Fed, but that number could drastically differ once inflation data is released. Valeria Bednarik, FXStreet analyst, said ahead of the key inflation data release:
‘A smaller-than-expected increase will be welcomed and trigger optimism, yet it is worth remembering the Fed’s favourite inflation measure is still the Core PCE Price Index and the effects of CPI on financial boards will likely be short-lived.
‘On the other hand, higher inflation data could boost concerns and end up favouring the US Dollar due to its safe-haven condition.’
Euro (EUR) Subdued amid Lack of Economic Data
Meanwhile, the Euro (EUR) is struggling to find a clear direction this morning as a lack of economic data meant the single currency would lean on its negative correlation with the US Dollar for impetus.
Investors on both sides appear to be hedging their bets ahead of the crucial inflation data from the US. The Euro could climb if inflation prints to forecast and the Fed hints at a pause at the next policy meeting. The release of the Federal Open Market Committee (FOMC) minutes from the last policy meeting could also be of interest to EUR investors.
Fed Chair Jerome Powell toned down his hawkish rhetoric at the last meeting, amid the recent banking sector turmoil. Powell alluded to tighter credit conditions could negate the need to tighten rates further. If a similar tone is struck, the US Dollar could slide, boosting the Euro.
Euro US Dollar Exchange Rate Forecast: US Inflation to Boost the Euro?
Looking ahead, the Euro US Dollar exchange rate could see movement with the latest inflation data for the US. With both headline CPI and core inflation in the spotlight, the Fed’s predicted movements could dictate direction. If inflation softens as expected, a pause in the Fed’s tightening cycle could boost the Euro.
Meanwhile, the US Dollar could rally if core inflation ticks higher, pointing to a stickier inflation than expected. This could see the central bank delay the inevitable pausing of interest rates, providing a timely boost for the ‘Greenback’.
