Euro US Dollar (EUR/USD) Exchange Rate Fluctuates on Aggressive Fed
The Euro US Dollar (EUR/USD) exchange rate is trading narrowly after Federal Reserve Chair Jerome Powell opened the door to a return to 50bps rate hikes. Meanwhile, mixed Eurozone data failed to inspire much confidence in the Euro.
At time of writing, the EUR/USD exchange rate is around $1.0537, relatively unchanged from this morning’s opening levels.
US Dollar (USD) Supported by Elevated Rate Hike Expectations
Meanwhile, the US Dollar remains propped up by a renewed hawkish rhetoric from the Federal Reserve. With expectations of a slowing pace of rate hikes, investors were buoyed once more. Fed Chair Jerome Powell delivered a hawkish speech before Congress yesterday.
A return to bold interest rate increases is expected, as Powell reiterated the central bank’s commitment to bring inflation down. He also added that they are prepared to increase the pace of rate hikes once more. The speech rallied USD investors and sent the US Dollar Index to the highest level since early November. Powell said:
‘The ultimate level of interest rates is likely to be higher than previously anticipated, (and recent data was) stronger than expected.
‘If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.’
Euro (EUR) Undermined by Mixed Economic Data
The Euro (EUR) exchange rate is struggling to find a clear direction this morning against many of its peers amid a flurry of mixed data. Industrial production and retail sales in Germany printed to mixed success, and a downwardly revised GDP growth rate for Eurozone failed to lift the single currency.
Industrial production in Europe’s largest economy rebounded far above expectations and improved by 3.5% MoM. After the 2.4% slump in December, the recovery could point to a brighter economic future, buoying investors.
However, downbeat retail sales in Germany heavily capped any optimism from industrial production. Both monthly and yearly figures soured moods and missed forecasts. Against an expected 2% climb, retail sales fell 0.3% instead. Following a drastic 5.3% fall in December, sky-high inflation and economic uncertainty continues to weigh on consumers. Further disappointing reading is that retail sales plunged 6.9% YoY, a ninth consecutive month of falling sales.
Carsten Brzeski, Global Head of Macro at ING, warns that optimism of the bloc’s economic recovery could wane:
‘What is also remarkable is the fact that January retail sales did not correct but continued their downward trend from the end of last year. While industry could become a mild growth driver in the first quarter, private consumption looks set to be a drag.’
Further weighing on the Euro is news that GDP growth in the Eurozone was also downwardly revised to a flat 0%. Against an expected 0.1% climb, economic growth stagnated QoQ.
Euro US Dollar Exchange Rate Forecast: Further Hawkish Speech to Bolster the Greenback?
Looking ahead, the Euro US Dollar exchange rate could see even further daylight between the US Dollar and the Euro. If Powell strikes a similar tone to yesterday, the Euro could slide. Scheduled to testify before the Senate once again, Powell will likely repeat his sentiment from yesterday.
Meanwhile, the Euro will be left exposed to market sentiment. If the ‘Greenback’ rallies again, the negative correlation the Euro shares with the US Dollar, could see the former plunge again.
