Euro to US Dollar Exchange Rate Continues on Downward Trend amid Italian Political Concerns
The Euro’s (EUR) downside trend against the US Dollar (USD) has persisted for a full month now, with the Euro to US Dollar (EUR/USD) well on track to see its fifth consecutive week of losses.
In a sharper drop than last week’s slip, the interbank EUR/USD level touched on a five-month-low of 1.17 on Wednesday and trended closely to that low at the time of writing.
The primary cause of Euro to US Dollar exchange rate losses over the past week has been the US Dollar’s continued rally, amid expectations that the US economy will continue to strengthen over the coming year.
Monetary policy between the Federal Reserve and European Central Bank (ECB) is perceived to be on track to diverge even more deeply.
The Fed is predicted to hike US interest rates two or three more times in 2018, but markets don’t expect the ECB will budge on Eurozone interest rates until 2020 due to subdued inflation in the bloc.
On top of inflation uncertainties, the Euro is being pressured by fresh political concerns, as a coalition between populist parties looks increasingly likely to be leading Italy’s next government.
Euro (EUR) Exchange Rates Pressured as Italian Political Concerns Take Focus
Italy’s next government is looking to be one made up of populist parties, and that reality dawning on markets has caused uncertainty and weakness in Euro (EUR) trade.
Italy’s far-right League party and the 5-Star Movement party appeared closer to agreeing to a coalition government, following weeks of discussions and stalemate since the Italian election on the 4th of March.
While sources from the 5-Star Movement claimed that there were no current plans to work towards a possible exit from the Eurozone or EU, both parties have a history of Euroscepticism.
As Italy was one of the founding members of the Euro, the possibility of the nation withdrawing from the currency is a major concern to some investors.
However, other investors doubt that there will be a major impact on the Euro from Italian political developments.
US Dollar (USD) Exchange Rates Continue to Rally on Economic Outlook
While recent US data hasn’t been hugely influential, it has been solid enough to keep investors optimistic that the US economic outlook is still improving.
With US ecostats strong, Federal Reserve interest rate hike bets rising and US Treasury 10-year bonds edging above 3% for the first time in years, there are many signs that investors are confident about the US economy.
This has kept the US Dollar (USD) highly appealing over the last month, despite some lasting uncertainty about US trade disagreements with China and the possibility of a trade war.
In fact, broad US Dollar strength has been a major reason for the Euro’s (EUR) lately, due to the reverse correlation between the rival currencies.
Euro to US Dollar (EUR/USD) Forecast: PMI Projections and Fed Minutes Next Week
Next Wednesday’s Federal Open Market Committee (FOMC) meeting minutes are likely to give investors a better idea of whether or not the Federal Reserve is planning to hike US interest rates three more times in 2018, rather than just two.
Strong US data and optimism from bank policymakers has made investors more bullish on the possibility of higher US interest rates before the end of the year.
If the Fed does indeed hint that there could be four rate hikes total in 2018, the US Dollar (USD) rally could continue and EUR/USD may see even further losses.
However, the Euro (EUR) could see stronger performance too – if upcoming Eurozone stats impress traders.
Wednesday will see the publication of the Eurozone’s May PMI projections from Markit, which will give investors a better idea of how the Eurozone economy has been performing this month.
If the Eurozone economy is seeing stronger economic activity than expected, it could bolster hopes that the bloc’s strong economic performance could continue a little longer rather than continuing to slow. This would make the Euro more appealing.
Markit will also publish its PMI projections for the US on Wednesday, and German growth results from Q1 have potential to cause some late-week Euro to US Dollar (EUR/USD) exchange rate movement too.