Fundamental Forecast for Euro: Bullish

EUR/USD climbs to fresh 2017-highs even as the European Central Bank (ECB) sticks to its current policy, with the pair at risk of extending the advance from earlier this month should key data prints coming out of the U.S. economy continue dampen expectations for three Fed rate-hikes in 2017.

The fresh remarks from the Governing Council suggests the central bank is in no rush to remove the zero-interest rate policy (ZIRP) as ‘a very substantial degree of monetary accommodation is still needed for underlying inflation pressures to gradually build up and support headline inflation developments in the medium term.’ In turn, the ECB appears to be on course to carry the record-low rate into 2018, but President Mario Draghi and Co. may continue to change their tune over the coming months as ‘the current positive cyclical momentum increases the chances of a stronger than expected economic upswing.’

Even though the ECB warns rates will ‘remain at their present levels for an extended period of time, and well past the horizon of our net asset purchases,’ it seems as though the Governing Council will start to wind down the quantitative easing (QE) program ahead of the December deadline as ‘risks surrounding the euro area growth outlook remain broadly balanced.’ Moreover, it seems as though the ECB will continue to tolerate the appreciation in the single-currency as the council argues ‘the ongoing economic expansion provides confidence that inflation will gradually head to levels in line with our inflation aim,’ and the shift in EUR/USD behavior may continue to unfold throughout the remainder of the year especially as market participants push out bets for the next Federal Open Market Committee (FOMC) rate-hike.

Fed Fund Futures highlight growing expectations Chair Janet Yellen and Co. will stay on hold throughout the remainder of the year as the central bank struggles to achieve the 2% target for price growth, with Governor Lael Brainard warning the central bank ‘should be cautious about tightening policy further until we are confident inflation is on track to achieve our target.’ In turn, the data prints coming out ahead of the September 20 interest rate decision may produce headwinds for the dollar as the core U.S. Consumer Price Index (CPI) is projected to slowdown in August, while Retail Sales are anticipated to increase 0.1% following a 0.6% expansion in July. Subdued price growth accompanied by signs of easing consumptions may encourage the FOMC to preserve a wait-and-see approach especially as Vice-Chair Stanley Fischer departs the central bank in October, and Fed officials may ultimately project a more shallow path for the benchmark interest rate as Hurricane Harvey and Irma risk derailing the economic recovery.