Euro US Dollar (EUR/USD) Exchange Rate Fluctuates amid Interest Rate Decision Uncertainty
The Euro US Dollar (EUR/USD) exchange rate is muted as investors move to the sidelines in anticipation for the European Central Bank (ECB) interest rate decision.
At time of writing, the EUR/USD exchange rate is around $1.1043, a 0.22% down from this morning’s opening levels.
Euro (EUR) Undermined by Monetary Policy Uncertainty
The Euro (EUR) is struggling for demand this morning ahead of the ECB’s monetary policy meeting. Despite expectations of a 25bps rate hike, and even the possibility of a bumper 50bps increase, uncertainty surrounding monetary policy is spooking EUR investors.
With policy tightening seeing 350bps of rate hikes since last summer, the consensus is a 25bps rate hike. However, the press conference from ECB President Christine Lagarde will attract the most attention. Indications of how the ECB continues to battle inflation will influence the Euro. At the last meeting in March, Lagarde stated that the central bank remains ‘data-dependant’, and the ECB still has a ‘lot more ground to cover’.
Elsewhere, fears over further collapses in the US banking system appear to be causing jitters in the European markets. Victoria Scholar, Head of Investment at interactive investment, explains the situation:
‘PacWest is the latest lender to fall victim to the turmoil in the US mid-cap banking sector. With worried investors either cutting their holdings or adding to short positions which has punished its share price.
‘PacWest has a heavy focus on commercial real estate lending, which has suffered on the back of the Fed’s aggressive rate hiking path after the longstanding punchbowl of cheap money was removed.’
US Dollar (USD) Under Pressure from Pausing Prospect
Meanwhile, the US Dollar is also struggling to find a clear direction this morning in the wake of the Federal Reserve opting to meeting expectations and raised the interest rates 25bps. The tenth consecutive hike is also widely expected to be the last in the current hiking cycle, as borrowing costs hit the highest level since the end of 2007.
Also weighing on the ‘Greenback’ are expectations that a pause is on the way. The statement released by the Fed omitted key phrases previously included. Wording alluding to further hikes was removed, and instead, suggestions of a pause to consider the impacts of it monetary policy. Fed Chair Jerome Powell reassured the market about the resilience and strength of the US banking system, and added:
‘Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The committee remains highly attentive to inflation risks.’
Euro US Dollar Exchange Rate Forecast: ECB Rate Hike to Boost the Euro?
Looking ahead, the Euro US Dollar exchange rate could see further fluctuations. Attention will be on the announcement of the ECB interest rate decision later today. The press conference from Lagarde will also draw a lot of attention. With the Eurozone narrowly avoiding a recession in Q1, and stronger-than-expected business activity, the central bank could opt for a bold 50bps rate hike, which could send the Euro soaring.
Meanwhile, the US Dollar could be influenced by the latest initial jobless claims. Expectations of the number of people filing for unemployment is set to tick higher. A cooling labour market could weigh on the ‘Greenback’ and push it lower.
