Euro to US Dollar Exchange Rate Advances as Trump’s Fed Comments Shock Investors
The Euro to US Dollar (EUR/USD) exchange rate has seen a modest recovery since hitting a yearly low last week, with comments from US President Donald Trump undermining demand for the US Dollar.
Demand for the Euro has been largely driven by movement in rivals like the US Dollar (USD), as well as concerns about potential financial contagion from the Turkish Lira’s (TRY) recent significant volatility.
However, the primary cause for the Euro to US Dollar exchange rate’s gains on Tuesday were market concerns about US President Donald Trump’s criticism of the Federal Reserve.
Euro (EUR) Exchange Rates Climb on Rival Weakness Despite Turkey Concerns
Persistent market jitters about the possibility of the Turkish Lira (TRY) currency crisis having a negative impact on Eurozone banks kept pressure on the Euro (EUR) on Monday, but the shared currency climbed more easily on Tuesday.
According to David Madden from CMC Markets UK, concerns about Turkey’s currency issues are likely to remain for some time:
‘The currency crisis is still hanging over Turkey, as the revelation that S&P and Moody’s downgraded the nation’s debt rating got traders wondering if individual Turkish banks could be in line to be downgraded next. Should that be the case, that could be the catalyst for a move lower in the Euro and or Eurozone banks.’
Indeed, the Euro’s advance on Tuesday was more due to weakness in the US Dollar (USD) than any notable improvement in Eurozone geopolitical news.
Still, recent Eurozone data has been steady too which has given the Euro some additional support.
US Dollar (USD) Exchange Rates Slump on Fresh Concerns about Federal Reserve Independence
Following weeks of strong US Dollar (USD) performance on expectations of rising Federal Reserve interest rates, investors sold the US currency overnight and into Tuesday.
The latest spanner in the US Dollar’s strength was due to controversial comments from US President Donald Trump.
Trump criticised the Federal Reserve for its recent interest rate hike, saying he was ‘not thrilled’ with Fed Chairman Jerome Powell – who Trump had picked for the job.
Investors are once again anxious that the independence of the US Central Bank could be undermined. According to Paul Donovan from UBS:
‘Markets have not particularly liked US President Trump’s comments, seeing them as a threat to the independence of the central bank. The Fed’s independence has little legal standing. It is independent by custom more than by statute.’
Investor concerns about the Fed’s independence are likely to weigh on the US Dollar until Trump either softens his comments or the Federal Reserve looks to dissuade fears.
The US Dollar is also being pressured by market anticipation for upcoming trade talks between the US and China. Hopes that trade tensions between the nations could lighten have dampened market demand for ‘safe haven’ currencies like the US Dollar.
Euro to US Dollar (EUR/USD) Forecast: Federal Reserve Developments in Focus
As the Eurozone’s economic calendar is relatively quiet until towards the end of the week, the Euro (EUR) is more likely to react to developments in Turkey and the strength of the US Dollar (USD).
The US Dollar could be in for a pivotal week, with upcoming US-China trade talks, the Federal Reserve’s latest meeting minutes due for publication on Wednesday, and other Fed developments likely throughout the week.
Wednesday’s Federal Reserve meeting minutes will give investors a better idea of the Fed’s monetary policy outlook but any accompanying comments from officials could prove influential too.
In particular, investors will be looking for signs of the Federal Reserve exerting its independence following criticism of the bank from US President Donald Trump.
The Jackson Hole symposium towards the end of the week will also be highly influential for this reason, as Fed officials may offer responses to President Trump’s recent comments.
Essentially, any changes to the Federal Reserve outlook or concerns about the Federal Reserve’s independence are most likely to drive EUR/USD.
If concerns about the Fed’s independence worsen, or if investors are given reason to sell the US Dollar from its best levels, the Euro to US Dollar (EUR/USD) exchange rate recovery rally could continue.