Euro US Dollar Exchange Rate Drops as US Inflation Overshoots Forecast
The Euro US Dollar (EUR/USD) exchange rate is climbing during today’s session as US inflation skyrockets, reaching a 40-year high.
At the time of writing, the EUR/USD exchange rate is trading at around $1.1390, down approximately 0.3% from today’s opening levels.
US Dollar (USD) Soars as US Inflation Reaches 40-Year High
The US Dollar (USD) is trending higher against the Euro (EUR) this afternoon after US inflation exceeded expectations.
The US inflation reading for January printed at 7.5%, above the market forecast of 7.3% and significantly higher than December’s 7%.
Largely due to increased energy prices, labour shortages and supply chain issues, this is the highest reading since 1982.
This is boosting USD exchange rates as it improves the likelihood of the Federal Reserve hiking rates faster than predicted.
Victoria Scholar, head of Investment at interactive investor, said:
‘US January consumer prices rose by 7.5%, topping analysts’ expectations for 7.3% year-on-year, driven by rising energy costs, labour shortages and problems with the global supply chain.
‘Some analysts believed that inflation had already peaked but today’s month-on-month data, rising 0.6% versus consensus 0.4% suggests there was more to go before inflation starts to ease. It looks as though the Fed could be in for around six rate hikes this year, beginning in March.’
Further supporting the ‘Greenback’ today is positive US initial jobless claims; forecast to beat the previous figures and to publish at 230K, the data printed better-than-expected at 223K.
The number of people claiming benefits has plummeted to a 5-week low; this will also support a more aggressive tightening of monetary policy from the Fed.
Euro (EUR) Falls in Response to ECB Speech
The Euro (EUR) is facing headwinds against the US Dollar (USD) after European Central Bank’s (ECB) vice-president, Luis de Guindos, delivered a cautious speech this afternoon.
De Guindos implied that ECB’s current monetary policy will remain unchanged for the time being which is causing pressure on the single currency.
However, he also suggested that the bank is prepared to make changes should further action be required in the future.
De Guindos said:
‘…in view of the current high level of uncertainty, we need more than ever to maintain flexibility and optionality in the conduct of monetary policy. We stand ready to adjust all of our instruments, as appropriate, to ensure that inflation stabilises at our 2% target over the medium term.’
In addition, the stronger US Dollar is also weighing on the Euro due to the negative correlation between the pairing.
Euro US Dollar Forecast: Will the Fed’s Monetary Policy Report Bolster USD?
Tomorrow, the publication of the Fed Monetary Policy Report may weigh on the Euro US Dollar exchange rate, should it outline additional tightening.
On the other hand, the Euro may come under pressure on Friday as Germany’s final inflation reading for January is expected to confirm a slowdown in inflation, from 5.3% to 4.9%.
Both EUR and USD are also likely to remain susceptible to geopolitical tensions as the Russia-Ukraine conflicts continue.
