Euro US Dollar (EUR/USD) Exchange Rate Softens Despite Softening US Inflation
The Euro US Dollar (EUR/USD) exchange rate is slipping on heightened Fed rate hike bets on hotter-than-expected US inflation.
At time of writing, the EUR/USD exchange rate is around $0.9735, down 0.32% from this morning’s opening levels.
Euro (EUR) Subdued amid Record Trade Deficit
The Euro (EUR) is continuing to feel the pressures of soaring energy prices as the Eurozone ran up a record trade deficit.
The balance of trade between the Euro area and the rest of the world surged to the highest trade deficit since Lithuania joined the European Union in 2015. Marking the tenth month of deficits, the trade gap widened to €50.9bn, the biggest on record. Surging energy costs have led to imports rising by almost 54% whereas exports rose by only 24%.
Despite a hawkish stance adopted by European Central Bank (ECB) policymakers, the Euro remains under pressure amid its negative correlation with the US Dollar. A higher-than-expected CPI inflation reading bolstered further rate hikes from the Federal Reserve. Ever-soaring interest rates continues to lend credence to global recession fears.
US Dollar (USD) Climbs on Reinforced Rate Hike Bets
Meanwhile, the US Dollar continues to rally on increased interest rate hike expectations. With hotter-than-expected headline CPI, the ‘Greenback’ initially saw a dip, but soon regathered its strength.
Annualised inflation was expected to soften to 8.1%, the second month of easing CPI still came in high at 8.2%. It was the lowest reading in seven months, but core inflation ticked to its highest level in 40 years as it accelerated to 6.6%. The underlying fear is that inflation still remains high, as excluding volatile items such as energy and food, prices continued to rise 0.6%.
Contributing substantial support to the US Dollar is heightened rate hike expectations. Along with a continued hawkish Fed rhetoric, hotter-than-expected inflation has buoyed investors’ moods. Stopping just short of a 100bps rate hike bet, the markets have effectively priced in another 75bps bump.
Euro US Dollar Exchange Rate Forecast: US Retail Sales to Bolster the US Dollar?
Looking ahead, the Euro US Dollar exchange rate could see fluctuations on the printing of US retail sales. An expected second month of strong sales could serve to bolster interest rate raises as the Fed looks for hints at a strong economy.
Meanwhile, the Euro could fluctuate on any further developments in Ukraine. Any further negative headlines from the conflict could impact global market sentiment, and in turn the Euro, could take a dent.