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EUR USD Stuck Around Opening on French Election Fears

Update; EUR USD has now slumped on the back of building market fears that Marine Le Pen is on track to win the French Presidency at the beginning of March. The Euro has fallen -0.4% against the US Dollar. The latest Greek crisis stalemate was finally broken when Athens agreed to legislate more austerity measures to be triggered in the event targets aren’t met in 2019. However, this did not reassure investors; it seems fears over the currency bloc’s future are overshadowing positive contemporary developments.

Original story continues below…

Spectres of the future are holding the Euro US Dollar exchange rate around opening levels, with Greece, Eurozone populism and the US monetary policy outlook weighing on demand for the world’s most traded currencies.

Eurogroup President Jeroen Dijsselbloem will address reporters later today as Eurozone creditors convene for a vital meeting on the latest Greek bailout. A continued deadlock risks delaying the next tranche of bailout funding for the stricken Hellenic nation.

With debt repayments due later in the year, Greece is at serious risk of defaulting if the stalemate can’t be broken at today’s ‘crunch’ meeting.

Indeed, ‘delays in completing the review raise the risk of another bailout being needed,’ ABN Amro Bank’s Nick Kounis warns.

This is keeping the Euro around opening levels versus the US Dollar. Investor hopes a solution will be found have prevented a decline – this is not the first time the Greek bailout has come so close to disaster, after all.

A vote of confidence from hard-line German Finance Minister Wolfgang Schäuble has helped settle uncertainties. ‘Greece is on the right economic path,’ Schäuble stated, playing down his previous comments that Greece would have to leave the Eurozone.

Greece has to carry out reforms. If Greece carries out the reforms, there won’t be any problems. If they don’t, but let me stress that Greece is, then there will be problems,’ he explained.

His claim that Greece is implementing the reforms creditors are seeking suggests that an amicable settlement will be found for the struggling nation. Until more concrete indications materialise, however, investors are remaining cautious.

This should be allowing the US Dollar to appreciate, given recent comments from Federal Reserve Official Loretta Mester on the likelihood of a near-term rate hike.

Mester is the latest in a growing list of Federal Open Market Committee Members (FOMC) to make hawkish noises on monetary policy.

I’d be comfortable with an increase in the Funds rate at this point, if the economy keeps going the way it’s going,’ Mester said, responding to questions after her speech in Singapore today. ‘My outlook builds in a gradual increase in the Funds rate over time. And I’m comfortable with that.

In my mind, where the economy is now argues that we should be bringing the rate up.

Fellow officials Janet Yellen, Jeffrey Lacker, Patrick Harker and Eric Rosengren have all suggested that rates need to be hiked again soon. Dennis Lockhart, who is due to retire at the end of the month, was more moderate, expecting just two rate hikes this year.

Lockhart is often viewed as accurately representing the consensus view among Federal Reserve leaders, although he is the outlier amongst those who have spoken publicly of late.

It is not Lockhart’s more cautious approach that has allowed the Euro to edge higher against the US Dollar today, however. Markets are still more interested in President Donald Trump than they are the Federal Reserve at this moment in time.

This is partly because the three-hike scenario being priced-in by markets is predicated on the need for Trump to announce the bold new stimulus measures he promised on the campaign trail.

Without these, the Federal Reserve may struggle to justify three hikes. Relative quietness on the topic of economic stimulus from the Trump administration is making investors jittery and therefore limiting US Dollar appetite today.

At the time of writing the EUR USD exchange rate was trading around 1.06, while the USD EUR exchange rate was trending around 0.94.