Overnight the Euro US Dollar exchange rate saw a sharp surge as a result of surprisingly dovish comments from Donald Trump.
Markets were wrong-footed by Trump noting that the US Dollar is ‘getting too strong’ and that he would prefer interest rates to remain low.
This triggered a kneejerk reaction that saw the Euro boosted as investors piled out of the ‘Greenback’, although it struggled to hold onto its gains for long.
Although the confirmation that German inflation had slowed from 0.6% to 0.2% in March was expected this still weighed heavily on the appeal of the single currency.
Signs of weaker inflationary pressure in Italy and Finland helped to boost expectations that the European Central Bank (ECB) will maintain its current neutral policy bias for some time to come.
With the finalised Eurozone consumer price index likely to reflect this general softening the EUR USD exchange rate looks set to remain under pressure next week.
February’s trade balance report could provide a rallying point for the single currency, however, if it demonstrates a return to surplus.
A solid rebound from January’s -0.6 billion deficit should foster greater confidence in the Euro, even if domestic monetary policy is likely to remain loose for longer.
After investors got over the initial surprise of Trump’s latest comments the US Dollar returned to a bullish footing, with markets still confident that the Federal Reserve will pursue a more aggressive pace of monetary tightening.
As analysts at BBH noted:
‘His admission of preferring low interest rate policy is not surprising, though he accused Yellen during the campaign of keeping rates low to help Clinton. Preferences do not drive exchange or interest rates, and low rates seem to run against the stronger growth that he is advocating.’
With financial markets closed for Good Friday the impact of the US consumer price index report is likely to be rather limited.
While forecasts point towards inflationary pressure having eased from 2.7% to 2.6% in March the ‘Greenback’ is unlikely to come under particular pressure, barring a severe downside surprise.
As the CPI is not the Fed’s chosen measure of inflation a weaker showing here is not expected to particularly dent the odds of another interest rate hike coming in the near future.
If global geopolitical tensions mount further then safe-haven demand could support the US Dollar, especially if Trump continues to row back on his earlier comments regarding China and the threat of a potential trade war.
Current EUR USD Interbank Exchange Rates
At the time of writing, the Euro US Dollar exchange rate was slumped in the region of 1.06. Meanwhile, the US Dollar Euro exchange rate was making solid gains at 0.94.