Euro US Dollar (EUR/USD) Exchange Rate Muted as Both Currencies Climb
The Euro US Dollar (EUR/USD) exchange rate has remained subdued today, as a risk-off trading mood strengthened both currencies.
At time of writing the EUR/USD exchange rate is at around $1.1316, virtually unchanged from this morning’s opening figures.
US Dollar (USD) Boosted Following Hawkish Federal Reserve Minutes
The US Dollar has continued to climb today, as investors flock to the safe-haven ‘Greenback’ following the release of the latest policy meeting minutes.
The latest minutes from the Fed represent a drastic change in approach from previous guidance, with the hawkish guidance shocking markets on Wednesday. A ‘very tight’ job market and continually rising global inflation are both cited in the minutes as possible reasons for an early interest rate hike, with Fed policymakers concerned that inflationary pressures such as supply bottlenecks may continue well into 2022. According to CME group’s ‘FedWatch’ tool, the probability of an early rate rise by the Fed is around 94%.
Anna Wong, economist for Bloomberg, had the following to say on the Fed minutes:
‘The minutes showed the FOMC is coalescing around the view the economy is ready for a broad-based removal of monetary accommodation, and the omicron variant is unlikely to slow it down. We think the risk of rate liftoff at the March meeting has increased substantially.’
USD could see a fall however following December’s growth figures for the country’s services. December’s non-manufacturing PMI fell above forecast to 62 as the US services sector continues to recover from soaring winter Covid-19 cases. With the US recording a new daily high of 540,000 cases on Thursday, it’s possible that staff absences due Covid-19 may have also been a cause of the index’s low reading.
Euro (EUR) Rises as Investors Bet on Early ECB Rate Rise
The Euro (EUR) has risen against many of its rivals today amid a risk-off trading environment and rising bond yields. Speculative bets by investors on an early rate rise by the may also have helped boost the currency.
The hawkish tone struck by the US Federal Reserve in their latest meeting minutes, released on Wednesday, has led analysts to predict an early interest rate rise from the ECB. Markets are already pricing in an early rate rise as soon as October, with analysts predicting that high inflation within the Eurozone will persist for longer than previously thought.
Inflation figures for Germany, the trading bloc’s largest member, could well add to investor speculation over a rate hike as the country’s rate of inflation hit its highest point since 1992. The rate of inflation did slow in December for the first time in six months, but printed rate of 5.7% currently puts the country at nearly triple the ECB’s 2% stability target.
Commerzbank analyst Joerg Kraemer had the following to say on the ECB’s current policy regarding inflation:
‘It is true that inflation should fall after the turn of the year, partly due to special factors. But the inflation risks are clearly pointing upward - not only for Germany but also for the euro zone. It's time for the ECB to take its foot off the gas.’
EUR/USD Exchange Rate Forecast: Will US Labour Market Tighten Further?
Looking to the week ahead, investors will be keenly watching employment data for the US on Friday. With non farm payrolls for December currently forecast to fall and the country’s unemployment rate expected to stay nearly unchanged from November, a further tightening of the labour market could place additional pressure on the Fed to raise interest rates early. This data, as well as speeches from various Fed board members on Friday, could push the US Dollar higher.
Inflation figures for the Eurozone are due on Friday, and coupled with Thursday’s German inflation figures the forecast 4.7% inflation rate could prompt further speculative bets of an interest rate hike by the European Central Bank.