Euro to Dollar rate under the spotlight

The euro/dollar exchange has dropped significantly recently, impacting future inflation. The European Central Bank (ECB) cited the Euro to Dollar exchange rate’s July decline as a key influence on its thinking about inflation this week and as a driver of its decision to end the era of negative interest rates with a larger-than-expected increase in its main benchmarks for borrowing costs.

President Christine Lagarde stated on Thursday that one of the factors that drove the Governing Council to favor the larger-than-expected hike that returned the ECB’s commercial bank deposit rate to zero on Thursday was the drop from over 1.04 against the USD in July.

On prompted the Euro to make another, albeit temporary, attempt to reverse the July slide that saw it briefly trade below parity with the dollar last week, which was prominent among the factors galvanizing the Governing Council this Thursday.

The ECB has frequently stated that it does not target exchange rates with its monetary policy, but this is not the same as saying it does not pay attention to them in pursuit of its inflation aim.

However, if there was ever any doubt, President Lagarde was unequivocal on Thursday in stating that the Euro-Dollar exchange rate is now under the microscope in this latter sense.

With the ECB increasingly linking exchange rate movements to monetary policy decisions, the bank and single currency may be on the verge of becoming limiting factors for those in and around the market who are bearish on the Euro-Dollar future.

On Friday, the Euro to Dollar rate was still down more than 10% year to date in 2022, but it may now be better supported, if not endowed with some corrective potential, given the current central bank activities on both sides of the EUR/USD equation.