A Coy US Fed Sees Euro/Dollar Exchange Rate’s Deadlock Unbroken

The euro to dollar exchange rate is forecast to retain current levels as the US Federal Reserve fails to pull the trigger to a US dollar recovery.

There was always the chance the US Federal Reserve would surprise markets and stimulate a dollar revival by hinting that it could raise interest rates at its June meeting.

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Initial currency market reaction to the Fed’s April statement suggested this was an outcome that markets had initially read.

However, a subsequent pullback in the US dollar complex betrays the markets’ initial assessment was overly bullish, and ultimately wrong.

The euro to dollar exchange rate conversion, having dipped, soon pulled higher on fresh USD selling taking it back into familiar territory.

“The FOMC wasn’t ready to give markets more guidance about an eventual rate hike at the June meeting,” says Piet Lammens at KBC Markets in Belgium, “EUR/USD hovered up and down, but finally closed the session in well-known territory at 1.1322.”

USD buying was stimulated as the FOMC dropped a previously held reference to global & financial risks posing risks for the US.

What disappointed dollar bulls was that the Fed’s language on inflation expectations remained unchanged despite the recent gains in oil prices.

This despite market expectations on the US inflation outlook have risen above December levels at which stage the US Federal Reserve was warning of up to four interest rate rises in 2016.  

The euro is therefore left ultimately directionless against the US dollar as neither appear to have the fundamental backing to justify a move out of current ranges.

“We see no trigger for a clear directional move in EUR/USD short-term. A genuine economic improvement in the US is probably needed to inspire a USD rebound. This trigger isn’t available right now,” says Lammens.

Therefore, continue watching the technical barriers defined by 1.15 to the top and 1.1250 at the bottom.