What Future Holds for Euro After Fed-Inspired Rally?

The euro enjoyed a decent rally last week with the unexpected help from the US Federal Reserve. Will the currency be able to maintain its upward momentum after the initial shock from the Fed’s statement fades?

The major driving force behind the euro’s rally was the weakness of the dollar following the Fed’s announcement. At the start of the current trading week, that factor continued to influence the Forex market. Yet the statement was not dovish strictly speaking and still suggested that an interest rate hike will happen later this year. Meanwhile, the European Central Bank has started its asset purchase program and is not going to end it anytime soon. The divergence in monetary policies of the United States and the eurozone does not play in favor of the euro.

Talking about the monetary policy of the ECB, central bank’s President Mario Draghi reiterated in today’s speech that the stimulating measures will remain in place for as long as necessary:

We intend to carry out our purchases at least until end-September 2016, and in any case until we see a sustained adjustment in the path of inflation which is consistent with our aim of achieving inflation rates below, but close to, 2% over the medium term.

Moving away from the theme of central banks, macroeconomic reports, especially those from Germany should play an important part in determining the euro’s behavior. PMI indicators for manufacturing and services in Germany, France and the whole eurozone will be released on Tuesday. The German Business Climate indicator will be released on Wednesday followed by the Consumer Climate on Thursday. Analysts expect that all the reports should demonstrate an improvement, and this might support the shared 19-nation currency.

Yet despite some supportive factors for the euro, market analysts remain pessimistic about the future of the currency. Forex Crunch was outright bearish on EUR/USD, saying:

The ongoing implementation of QE in the euro-zone continues weighing on the pair and Draghi will probably let us know that he will not let go, as he already did.

DailyFX was more cautious as profit-taking may support the euro in a short term, yet suggested commodity currencies as a preferable investment for those traders who want to be short on the dollar.

If you have any questions, comments or opinions regarding the Euro,
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