Euro to US Dollar Exchange Rate Continues Recovery despite ECB’s Dovishness

Investors continued to buy the Euro to US Dollar (EUR/USD) exchange rate today, with the pair still recovering from the lows seen at the beginning of the week. The US Dollar has been tumbling since US inflation data was published yesterday, which is boosting Euro appeal despite a cautious tone from the European Central Bank (ECB).

Last week’s surging rebound in demand for the US Dollar pulled EUR/USD down from 1.2072 to 1.1912, a considerable loss of over a cent and a half.

Then, when markets opened on Monday morning EUR/USD slumped and briefly touched on a low of 1.1838. This was the worst level for EUR/USD in three months, since the end of November 2020.

Since then though, EUR/USD has been recovering and has advanced past the week’s opening levels again. At the time of writing, EUR/USD is trending in the region of 1.1958, around the best levels for the pair all week so far.

The Euro has been able to benefit from weakness in its biggest rival, the US Dollar. The Euro and US Dollar often see negative correlation, so the Euro has been more appealing since the US Dollar started tumbling on US inflation data yesterday.

Today’s European Central Bank (ECB) policy decision actually did little to dampen the Euro’s movement, despite the ECB maintaining a highly cautious stance.

The ECB announced that it would ramp up bond purchases over the next quarter to help stimulate the Eurozone economy. The bank also lowered its 2021 growth forecasts, as was generally expected.

However, the bank did raise its inflation forecasts for 2021 and 2022. This inflation forecast upgrade offset some of the bank’s dovishness and helped the Euro to hold its ground against the tumbling US Dollar.

The primary cause of today’s EUR/USD gains was weakness in the US Dollar however.

Investors have been selling the US Dollar since yesterday’s US inflation rate results fell short of expectations.

The weaker than expected US inflation results doused speculation that the Federal Reserve could be pressured by higher price pressures and tighten US monetary policy.

With Fed rate hike bets dampened for now, markets were once again more willing to take risks. This led to a selloff in the safe haven US Dollar.

Market sentiment has also been boosted by news that a large US fiscal stimulus package had finally been passed by Congress. This further weighed on USD and made it easier for EUR/USD to recover.

Some more notable Eurozone and US data will round off the week tomorrow.

German inflation rate and Eurozone industrial production data is due. If the data beats forecasts it could strengthen hopes for Eurozone economic resilience and help the Euro to keep climbing.

However, weak Eurozone data could make investors more concerned about the Eurozone’s recovery outlook. EUR/USD could be even further dampened if tomorrow’s US confidence data from Michigan University impresses investors and boosts US Dollar demand.

Of course, any developments in Eurozone and US coronavirus situations will also continue to drive shifts in the Euro to US Dollar exchange rate.