Euro US Dollar Exchange Rate Pushes Higher Ahead of Forecast Fed Interest Rate Hike
As markets continued to brace for the Federal Reserve’s March policy decision the Euro to US Dollar (EUR/USD) exchange rate recovered some of its lost ground.
With an imminent interest rate hike already effectively priced into the US Dollar (USD) investors have seen little additional reason to buy into the less risk-sensitive currency.
Even though forecasts point towards a modest rebound in February’s US existing home sales data this is unlikely to be enough to alter the course of USD exchange rates this afternoon.
Instead, investors look set to maintain a more cautious view of the US Dollar until the Fed releases its latest economic forecasts and dot plot.
Any indication that the central bank is planning to pursue a more aggressive pace of monetary tightening over the coming year could see the EUR/USD exchange rate weaken markedly overnight.
Less Hawkish Fed Dot Plot Forecast to Limit US Dollar Upside Today
However, if the Fed adopts a less hawkish outlook this may encourage the EUR/USD exchange rate to extend its current gains further.
Investors could well be disappointed if policymakers fail to signal an increased likelihood of interest rates rising a total of four times over the course of 2018.
As analysts at Danske Bank commented:
‘We expect the Fed to maintain the three hikes signal for this year but showing more confidence in the signal, as more of the dovish members now seem to support this. If we are right, this would likely be interpreted dovishly, as markets are speculating whether the Fed is about to hike four times this year. Markets have already priced in three hikes this year, which is quite a lot at this point. We think the recent average hourly earnings and CPI data support this. However, we note that some of the most outspoken doves do not vote this year (Bullard, Evans, Kashkari) meaning that the median dot among the voting FOMC members is likely higher than the median dot among all members.’
Either way, the US Dollar could find a rallying point ahead of the weekend if February’s durable goods orders figure shows a solid improvement on the month.
As long as the wider sense of global market risk appetite remains muted, thanks to trade war fears, the upside potential of the EUR/USD exchange rate is likely to stay somewhat limited.
Euro Exchange Rates Vulnerable Ahead of European Central Bank Economic Bulletin
The publication of the European Central Bank’s (ECB) latest Economic Bulletin may offer additional support to the EUR/USD exchange rate on Thursday.
Signs that the ECB is continuing to shift towards a more hawkish policy outlook could give the Euro a strong boost, even though the odds of any actual policy action remain limited.
On the other hand, a more cautious view of the economic outlook may see EUR exchange rates return to a generally weaker footing.
With March’s raft of Eurozone manufacturing and services PMIs forecast to have eased on the month, despite remaining in expansion territory, the EUR/USD exchange rate may struggle to hold onto its traction in the near term.