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Talking Points

- EUR/USD recovered some of the ground in Europe Thursday that it lost in the US Wednesday after the latest Federal Reserve monetary policy meeting.

- In its Economic Bulletin, the European Central Bank said recent volatility in the exchange rate represents a source of uncertainty which requires monitoring.

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EUR/USD recovered a little in early European trading Thursday after falling sharply in the US Wednesday on a marginally more hawkish than expected meeting of the US rate-setting Federal Open Market Committee. The Fed kept open the possibility of another US rate rise in December and also confirmed that it is to begin winding down its bloated balance sheet next month.

In response, the US Dollar rose strongly as the probability of another interest rate increase this year climbed to above 60%. However, EUR/USD rallied in Europe although it failed to recover all its losses and remained well below the psychologically-important 1.20 level.

Chart: EUR/USD Five-Minute Timeframe (September 20-21, 2017)

EUR/USD Rallies Modestly in Europe After Fed Meeting, ECB Bulletin

Chart by IG

The Euro was helped by the publication of the European Central Bank’s latest Economic Bulletin, in which it highlighted the economic strength of the region, while also pointing to inflation risks.

At its monetary policy meeting on 7 September 2017, the Governing Council assessed that while the ongoing economic expansion provides confidence that inflation will gradually head to levels in line with its inflation aim, it has yet to translate sufficiently into stronger inflation dynamics,” the ECB wrote.

The economic expansion, which accelerated more than expected in the first half of 2017, continues to be solid and broad-based across countries and sectors. At the same time, the recent volatility in the exchange rate represents a source of uncertainty which requires monitoring with regard to its possible implications for the medium-term outlook for price stability.

Measures of underlying inflation have ticked up slightly in recent months but, overall, remain at subdued levels. Therefore, 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,” it added.

--- Written by Martin Essex, Analyst and Editor

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