EUR / USD Rips Higher as Euro Strength Meets Dollar Weakness

The Euro to Dollar exchange rate (EUR/USD) has recorded a one-year high as the after-glow from ECB President Draghi's comments on the state of the Eurozone economy continue to be felt.

The move higher in EUR/USD was in fact the result of a combination of political uncertainty in the US and renewed optimism over the outlook for the Eurozone economy .

The Euro half of the pair rose after the usually-cautious Draghi suggested at the ECB Forum on Central Banking that the European Central Bank (ECB) would wind down its stimulus measures as the recovery in the Eurozone was, “strengthening and broadening.”

He added in a key phrase that:

“As the economy continues to recover, a constant policy stance will become more accommodative, and the central bank can accompany the recovery by adjusting the parameters of its policy instruments – not in order to tighten the policy stance, but to keep it broadly unchanged.”

The withdrawal of stimulus is positive for the Euro as stimulus dilutes the unit value of the currency.

At the same time, the Dollar weakened to 8-month lows due to the news that the long-awaited fiscal spending dump would probably be delayed due to a delay in the repeal of Obamacare.

Trump has said he cannot afford to cut taxes unless Obamacare is replaced by his own healthcare policy, and on Tuesday a meeting was held to stall the Senate vote on the new bill, scheduled for this week, because Senate Republicans did not think they would get a majority.

Republican moderates are bucking against the bill after analysis by a nonpartisan Budget Congressional Office concluded the new Trump bill would result in over 22 million Americans being left without health insurance by the end of the next decade.

As a result of the meeting the vote has been delayed until after the summer recess which begins on July 4.

The delay will mean that Trump’s promised injection of public funds back into the economy via tax cuts predominantly but also infrastructure spending will be delayed.

The fiscal easing resulting from these measures would have been expected to increase spending and raise inflation, which in turn would have forced the Federal Reserve to raise interest rates more rapidly.

Higher interest rates increase the value of currencies by increasing capital flows from investors seeking higher returns on their money.

Can the EUR/USD go Higher Though?

As far as EUR/USD goes, more upside above the 1.1388 highs may be problematic.

Our latest technical forecasts which accurately forecast the current rally  noted a major resistance line (R2) situated at 1.1390 followed by a trendline at about 1.1410.

Therefore, for further upside the exchange rate would have to ‘vault’ well clear of these obstacles, perhaps, confirmed by a moving above 1.1460, which would then see probable targets at 1.1500, 1,1600 and so on.

GBP/USD Finds a Floor

The GBP/USD stalled at about the 1.2800 on Wednesday after comments from the deputy governor of the Bank of England took the wind out of Sterling’s sails.

Dep governor Sir Jon Cunliffe said that he was supportive of the Bank’s Governor’s stance of not wanting to raise interest rates.

This placed him in the dovish camp of a split monetary policy committee who recently voted 5-3 to keep rates unchanged at their current record low level of 0.25%.

Sterling rises in line with interest rates as higher interest rates attract more foreign capital to British shores.

Recent comments from Chief Economist Andy Haldane had suggested he was teetering on the side of raising rates, which led to a recovery in the Pound.

However, the comments from Cunliffe on Wednesday weighed on the Pound as they suggested the committee might vote 4-4 at the next meeting in August, with Carney exercising the deciding vote, and leaving rates unchanged.

GBP/USD was shielded from a decline by a comparable decline in the Dollar due to the deferment of the Senate vote on Trump’s healthcare bill until after the summer recess.

The bill had been expected to be voted on this week but fractious infighting within the Republican party have raised concerns they will not get a majority in the closely balanced 52-48 Republican/Democrat upper house.

The repeal of Obamacare and its replacement with the new bill was hoped to save the treasury enough money to afford to lower taxes and effect fiscal stimulus.

It was hoped fiscal stimulus would increase spending, inflation and interest rates, thus boosting the Dollar.