Euro US Dollar Exchange Rate Fluctuates amid Wavering Risk Sentiment
The Euro US Dollar (EUR/USD) exchange rate struggled to find a clear direction this morning as reduced Federal Reserve interest rate hike bets is compounded by a mixed market mood.
At time of writing the EUR/USD exchange rate is trading around $1.0826, relatively unchanged from this morning’s opening levels.
US Dollar (USD) Undermined by Slower Fed Rate Hike Expectations
The US Dollar opened the week on the backfoot as a mixed market mood sapped demand for the safe-haven currency. Softening inflation has tempered Federal Reserve rate hike expectations, and in turn has significantly improved risk sentiment.
Market optimism is providing riskier currencies a rare tailwind. Odds of a 25bps rate hike from the Fed in the March meeting have now climbed to 80%, with a quarter point hike fully baked in for the next meeting.
Amid a lack of major economic data, the US Dollar remains open to market sentiment and the prospect of slower Fed rate hike bets could keep a lid on proceedings.
Euro (EUR) Supported by Hawkish ECB
Meanwhile, the Euro is modestly supported by hawkish comments from the central bank. ECB Governing Council Member Oli Rehn commented this morning that he expects significant rate hikes at the next central bank meetings.
However, keeping a firm lid on any significant gains for the Euro is the latest data for German wholesale prices. Falling further than predictions, wholesale prices in Europe’s largest economy fell 1.6% MoM in December. The decline was the biggest since December 2008. With inflationary pressures finally retreating, investors could be disappointed as rate hike expectations could also retreat.
Economists at Deutsche Bank are predicting that a more sustained improvement in global risk sentiment could greatly benefit the Euro over the ‘Greenback’. They commented:
‘The pieces are falling into place for a more sustained downturn in the Dollar. The combination of China reopening and improvement in the European energy situation should reduce the safe-haven premium underpinning the Dollar.’
Euro US Dollar Forecast: Improving Market Sentiment to Weigh on US Dollar?
Looking ahead, the Euro US Dollar exchange rate could see further movements amid fluctuating risk sentiment. The reopening of China and the peaking of inflationary pressures around the world could sap demand for safe-haven currencies like the ‘Greenback’.
However, with the Ukraine conflict ever-escalating and mounting fears of a global recession, risk sentiment is also just as likely to diminish, potentially boosting the US Dollar.
