The Euro US Dollar (EUR/USD) exchange rate surged in the aftermath of the European Central Bank’s (ECB) interest rate decision and third quarter US GDP data release.
Comments from the ECB and slowing US GDP growth boosted EUR/USD nearly 0.7% at the time of writing to trade at 1.1676.
Euro (EUR) Exchange Rates Strengthen Following ECB Rate Decision
The Euro (EUR) firmed in the aftermath of ECB interest rate decision today.
Policymakers decided to keep interest rates unchanged but confirmed the central bank would ‘moderately lower the pace’ of its Pandemic Emergency Purchase Programme (PEPP).
The ECB also reiterated its policy stance that interest rates would remain at current levels or lower until inflation reaches its 2% target.
On inflation, the bank said:
”The governing council stands ready to adjust all of its instruments, as appropriate, to ensure that inflation stabilises at its two per cent target over the medium term.”
Adding there may be a “transitory period in which inflation is moderately above target.”
During the press conference following the interest rate decision, ECB President Christine Lagarde said:
”The euro area economy continues to recover strongly, although at a more moderate pace. Rising energy prices, the recovery in demand and supply bottlenecks are currently pushing up inflation. While inflation will take longer to decline than previously expected, we expect these factors to ease in the course of next year.”
Following the ECB decision, investors appeared to bet that tightening monetary policy won’t be in line with the bank’s forward guidance due to the central bank’s PEPP slowing and policymakers acknowledging inflation as a concern, which in turn supported the Euro.
The Euro had also received support early in Thursday’s session after the Eurozone economic sentiment indicator rose more than expected in October.
The index increased to its highest level since July’s record high, despite inflation concerns among consumers and producers hitting all-time highs, as sentiment improved among service providers and constructors.
US Dollar (USD) Exchange Rates Dented by US GDP Miss
The US Dollar (USD) slipped today after the latest US GDP figures revealed growth slowed more-than-expected during the third quarter to 2%, missing forecast of 2.7%.
The figure revealed a sharp drop on the second quarter of 6.7% growth, and was the weakest growth since the record contraction in the second quarter of 2020.
Against the backdrop of rising inflation and global supply chain disruption, lower-than-expected growth data fuelled concerns over the strength of the US economic recovery.
However, US GDP is forecast to recover and accelerate in the fourth quarter into next year as the impact of Delta variant of coronavirus wave subsides.
Growth also looks set to pick up next year as the US government funding of $5tn into the economy begins to take effect.
Euro US Dollar Forecast: Inflation and GDP Data to Rock EUR/USD?
The Euro US Dollar exchange rate looks set for more volatility heading into the end of the week.
Following German inflation coming in at 4.5% earlier today, the Eurozone’s inflation rate release tomorrow may drive volatility in EUR exchange rates.
Forecasts for inflation in the bloc point to a 3.7% rise in October, up from September’s 3.1% reading.
With the ECB maintaining its policy stance at its policy meeting, which appears to be increasingly divergent from other major central banks, rising Eurozone inflation may dent the Euro’s gains today.
Moreover, Eurozone third quarter GDP may drive EUR/USD even further lower, with growth expected to have slowed to 3.5% between July and September from 14.3% in the second quarter.
While investors appeared to bet on a rate hike sooner than the ECB’s forward guidance signalled today, rising inflation and slowing growth revealed in data tomorrow could fuel fears of stagflation and weigh on EUR exchange rates.
Meanwhile, more high-impact US data releases look likely to drive movement in the US Dollar.
The Federal Reserve’s preferred indicator of inflation, the PCE price index, is forecast to have risen to 4.4% in September, up from 4.3% in August.
Alongside today’s GDP data, the inflation reading may influence the central bank’s stance on tightening monetary policy at its November policy meeting, although recent comments from policymakers reiterated plans to taper its bond-buying programme.