EUR USD Exchange Rate Forecast to Return to Downtrend on Dovish Draghi Comments

The poor run of US data continued at the start of the week, with May’s durable goods orders contracting far more sharply on the month than forecast.

This offered a fresh boost to the Euro US Dollar exchange rate, throwing the likely timing of the next Federal Reserve interest rate hike further into doubt.

Orders contracted -1.1% on the month, pointing towards a greater sense of caution amongst consumers in the world’s largest economy.

Confidence in the Euro, meanwhile, strengthened in response to news that the Italian government had intervened to wind down two provincial lenders.

While this brought the troubled Italian banking sector back into the spotlight investors still greeted the development positively, shoring the single currency up against its rivals.

However, the EUR USD exchange rate could soon come under renewed pressure thanks to the implications this has for the future of the banking union.

With Italy continuing to circumvent the spirit of the EU banking directive the prospect of greater fiscal integration within the Eurozone seemed to weaken.

Flaring tensions in Greece could also put a dampener on the Euro, with municipal workers in conflict with the government over the extension of short-term contracts.

Demand for the US Dollar could remain generally muted this week, meanwhile, providing that domestic data continues to print poorly.

Forecasts point towards a further weakening in the latest consumer confidence index, which could bode ill for the health of the wider economy.

Of particular concern will be commentary from members of the Federal Open Market Committee (FOMC), with markets hoping to see further signs that the central bank will adopt a more aggressive pace of monetary tightening.

However, if Friday’s personal consumption expenditure report fails to show an uptick in inflationary pressure the EUR USD exchange rate could find a fresh rallying point.

Given that the PCE is the Fed’s preferred measure of inflation a disappointing result here could damage the likelihood of another interest rate hike coming before the end of the year.

Investor jitters are likely as European Central Bank (ECB) President Mario Draghi is due to speak tonight, leaving the Euro vulnerable to renewed downside pressure.

If Draghi continues to emphasise the neutral policy outlook of the ECB and to talk down the prospect of the quantitative easing program being tapered in the near future then the EUR USD exchange rate could trend lower.

However, any signs of greater optimism in the outlook of the Eurozone economy may encourage a fresh round of speculation over the possibility of the central bank returning to a tightening bias sooner rather than later.