Euro US Dollar (EUR/USD) Exchange Rate Firms on Signs of More Hawkish ECB
The Euro US Dollar (EUR/USD) exchange rate is edging higher on Friday but is on course to record a significant weekly loss.
Amid a risk-off market mood, declining US Treasury yields have weakened the US Dollar which has allowed EUR/USD to firm and trade around $1.1333 at the time of writing on Friday morning.
The Euro has also made some gains on suggestions that the European Central Bank’s (ECB) policy stance may be becoming more hawkish, which would narrow the perceived divergence from other major central banks.
Euro (EUR) Bolstered by Hints of ECB Policy Shift
The Euro has continued receiving support on Friday from yesterday’s release of the minutes from the ECB’s December policy meeting.
The minutes suggested that the central bank’s position is beginning to shift and may it become more inclined to consider altering its loose monetary policy stance.
Revised inflation forecasts almost doubling, a greater acknowledgement of uncertainty in price pressures, and the likelihood that inflation is not transitory and will linger for longer hinted the ECB may have to change its policy.
The discussion on the bank’s data modelling stated:
“It was reiterated that models calibrated on pre-pandemic data might not be well suited to capturing major structural changes or a potential switch from a lower to a higher inflation regime.”
And on developments in financial markets said:
“(There was) growing conviction among investors that the period of low inflation was over and that globally monetary policy would have to be tightened sooner than had been anticipated earlier in 2021.”
The increased debate on higher inflation for longer during the ECB meeting suggested to some investors that the central bank will shift policy stance in the coming months, which in turn supported EUR sentiment.
US Dollar (USD) Limited by Declining US Treasury Yields
Falling US Treasury yields are limiting US Dollar (USD) gains at the end of the week, and offsetting support from safe-haven demand for the currency amid risk-off market trade.
After hitting two-year highs earlier in the week that sent the US Dollar surging, the pullback in yields on Friday has capped USD strength.
Cautious market trade, widespread inflation jitters, and expectations for aggressive monetary policy tightening from the Federal Reserve, starting with the first of four rate hikes this year in March, had boosted the US Dollar in midweek trade.
However, as the Federal Reserve is now in its blackout period ahead of its January policy meeting, a lull in aggressive bets on the central bank tightening policy has cooled US Treasury yields as investors wait for more insight from the Fed.
Lower yields have offset safe-haven demand for the ‘Greenback’ caused by souring market sentiment fuelled by intensifying tensions between Russia, and the US and EU.
Reports of over 100,000 Russian soldiers amassing at the Ukraine border has heightened invasion fears.
Talks have begun between US Secretary of State Antony Blinken and Russian Foreign Minister Sergei Lavrov in an attempt to use diplomacy to avert the conflict.
Blinken has warned of a “united, swift and severe” response should Russia invade Ukraine.
Euro US Dollar Exchange Rate Forecast: EUR/USD to Give Up Gains?
Shifting market risk appetite looks set to continue driving movement in the Euro US Dollar exchange rate going into the week.
In light of the ECB meeting minutes released yesterday, a speech from the bank’s President Christine Lagarde and any hints of a change of her view on inflation as transitory may stoke EUR volatility.
Eurozone consumer confidence data for January released this afternoon could dent the Euro later in the sessions, with forecasts pointing to a fall to its lowest level since March 2021.
Meanwhile, a speech from US Treasury Secretary may drive movement in the US Dollar after saying yesterday that she sees inflation falling back to 2% by the end of 2022.
