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Doubts Over German Coalition Deal Dent Euro US Dollar (EUR/USD) Exchange Rate

Euro US Dollar (EUR/USD) Exchange Rate Falters on German Coalition Doubts

As reports emerged suggesting that the SPD has rejected coalition talks with Angela Merkel’s CDU the Euro to US Dollar (EUR/USD) exchange rate came under pressure.

Markets were naturally unsettled by the news that the ‘grand coalition’ may not take off after all, throwing the German political scene back into a state of uncertainty and disarray.

This prompted the Euro (EUR) to trend lower on Tuesday morning, losing ground to rivals including the Pound (GBP) and Australian Dollar (AUD).

Disappointing German wholesale price index figures added to the bearish mood of the single currency, with prices showing an unexpected contraction of -0.3% on the month in December.

With signs suggesting that inflationary pressure within the Eurozone’s powerhouse economy is not building as investors, and policymakers, would like to see the appeal of the Euro declined.

Weaker Fed Interest Rate Hike Odds Limit US Dollar (USD) Demand

Growing doubt over the prospect of an imminent Federal Reserve interest rate hike have limited the appeal of the US Dollar (USD), meanwhile, to the benefit of the EUR/USD exchange rate.

As policymakers have offered rather mixed messages in recent days the Federal Open Market Committee (FOMC) looks less likely to adopt an aggressive pace of monetary tightening over the coming months.

The US Dollar has struggled to find any support as a result, especially with the general sense of market risk appetite elevated.

Concerns that the Trump administration will continue to pursue a more isolationist trade policy also weighed down USD exchange rates, with investors seeing little reason to favour the US Dollar at this juncture.

Support Forecast For US Dollar on Improved Manufacturing Surveys

Even so, the EUR/USD exchange rate may struggle to find any fresh support in the near term if the latest US data proves encouraging in nature.

Forecasts point towards a slight uptick in January’s Empire manufacturing index, with the measure expected to rise from 18 to 19.

While this would not be the most dramatic improvement this could still encourage the US Dollar to rally, boosting confidence in the underlying health of the world’s largest economy.

As analysts at Nomura noted:

‘For January’s first round of business surveys, we expect continued elevated readings from the Empire State and Philly Fed manufacturing surveys.

‘December’s ISM manufacturing report punctuated a strong year for manufacturing and we anticipate momentum to continue near term.’

However, if Wednesday’s industrial and manufacturing production figures fail to paint an optimistic picture of the US economy this could see the EUR/USD exchange rate return to a stronger footing.

Euro (EUR) Jitters Forecast as Markets Gauge ECB Policy Outlook

Political developments in Germany are likely to remain a key source of volatility for the EUR/USD exchange rate over the coming days.

Commentary from various European Central Bank (ECB) policymakers will also be in focus, with investors hoping to see greater signs of hawkishness.

While recent Eurozone data has proven generally impressive, however, the odds of the ECB returning to an explicit monetary tightening bias are still rather limited.

Unless policymakers express increased confidence in the domestic outlook and downplay concerns over inflation the EUR/USD exchange rate may struggle to find any particular momentum.