US Dollar Continues To Outperform The Euro On The Back Of A Dovish Fed

Invezz
  • September 19th 2019, 21:53

The EURUSD pair continues to trade sideways this week as the respective central banks move to stabilize the exchange rates. On Friday, September 13, the EURUSD pair closed at 1.10711 and later climbed to 1.11568 on Sunday, September 15. However, the pair sunk to 1.09976 on Tuesday but traders defended the 1.1000 support.

On Thursday, September 12, the European Central Bank introduced a $21.9 billion stimulus package to boost the economy of the Eurozone. The bond-buying program targets to revive growth in the common economy in the face of declining demand and subdued inflation. Besides, the ECB eased the deposit rate further by 0.10% to -0.5%. Although the rate cut agrees with analysts’ expectations, the message the ECB communicated was that the Eurozone’s economy could be in a crisis.

Following the quantitative easing and the rate cut, the Euro gained some ground against the US dollar for two straight days to September 15. However, the market reaction to quantitative easing was not positive for long. According to CNBC, Carsten Brzeski, ING Chief Economist, said in a note that it is unlikely that the stimulus package will have the potential to turn around the Eurozone’s economy.

A dovish Fed boosting the greenback

On Wednesday, the US Federal Reserve cut interest rates by 25 basis points. According to the FOMC, challenges in the global economy have “muted inflation pressures.” Some of the challenges cited include geopolitical tensions in the Middle East and the US-China trade war. According to the Fed, the remaining FOMC meetings might produce further cuts.

As a result, the value of the greenback against the common currency increased. During the early trading hours of Wednesday, the EURUSD was at 1.10723 but later dropped to 1.10257 after the Fed’s interest rate easing. Generally, the EURUSD remains undecided for much of this week since Monday. This is perhaps an indication that the Eurozone and the US are facing similar hurdles to economic growth. Evidently, both central banks are dovish as they try to work out ways to return their respective economies on the path of growth.

EURUSD outlook

Analysts at Danske Bank believe that the Fed will cut bank rates further. According to the analysts, “the market was pricing about a 50% probability of another 25bp cut in October and December respectively” before the Wednesday meeting. The analysts further noted that during the past meetings, the USD rates edged higher because of the decisions by the Fed to leave the interest rates unchanged. However, this is about to change as the Fed embarks on an easing path.

Lower USD rates will see the EURUSD pair gain significant pips going forward. This is especially highly likely if the ECB continues to support the Eurozone economy with more stimulus packages. Based on this analysis, Danske Bank analysts are sticking on their forecast of 1.10 for the EURUSD pair going forward. Nonetheless, if the Fed succeeds in dampening investors’ confidence in more rate cuts before yearend 2019, the greenback might continue to outperform the common currency. 

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