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EUR AUD Exchange Rate Forecast to Remain Volatile as Eurozone Political Risk Mounts

Even though markets were shocked that Donald Trump had emerged victorious in the US presidential election this ultimately failed to keep the EUR AUD exchange rate on an uptrend for long.

  • US election shock prompted major EUR AUD exchange rate volatility – Markets spooked by prospect of Trump presidency
  • 2016 Fed rate hike odds dropped – Risk appetite quick to rebound as ‘Aussie’ recovered
  • Dovish ECB comments undermined Euro demand – Prospect of further policy easing discouraged investors
  • Euro downside bias forecast ahead of Italian referendum – Further populist political shocks remain significant risk factor

As the initial concern over the US result fades, though, market attention is turning increasingly towards Europe, where a number of major votes over coming months could see a further shake-up of the political order.

Australian Dollar (AUD) Quick to Recover from US Election Volatility

Despite an expected uptick in the Chinese Consumer Price Index markets were gripped by a wave of risk averse selling on Wednesday, the result of a shock win for Donald Trump in the US presidential election. Concerns over the various uncertainties surrounding the Republican candidate, as well as his many controversial policy pledges, encouraged investors to pile into safe-haven assets, with the relative weakness of the US Dollar (USD) also helping to buoy the Euro (EUR).

However, a Trump victory was seen to reduce the odds of the Federal Reserve raising interest rates in December, a prospect that is Australian Dollar (AUD) positive. Any delay in the Fed returning to its monetary tightening cycle eases pressure on the Reserve Bank of Australia (RBA) to consider adopt a fresh easing bias, limiting the downside pressure on the ‘Aussie’. As a result, with markets also showing an ability to rapidly adjust to the changed political landscape, the Euro to Australian Dollar (EUR AUD) exchange rate soon fell back from its initial high to return to a downtrend.

Weaker Australian Inflation Expectations Failed to Boost EUR AUD Exchange Rate

Despite November’s Australian consumer inflation expectation result showing a slight moderation this failed to dampen the optimism of the ‘Aussie’ on Thursday morning. Following the more conciliatory tone of Trump’s acceptance speech investors have been inclined to take a less pessimistic view of the situation. This has helped the antipodean currency to recover ground and trend higher across the board, benefitting from the rapid resurgence in market risk appetite.

Confidence in the Euro, on the other hand, has been limited by the more dovish nature of recent comments from European Central Bank (ECB) policymakers. While the worrying strength of the Euro soon started to fade investors were not encouraged by the ECB’s commentary. Speculation remains that the central bank will extend its quantitative easing program in December, with the potential for further loosening measures if economic sentiment deteriorates.

EUR AUD Exchange Rate Forecast: Eurozone Political Risk Predicted to Weigh on Euro Outlook

The EUR AUD exchange rate could see its losses extended ahead of the weekend, should the finalised German Consumer Price Index for October fail to encourage bullishness. Markets remain unconvinced by the resilience of the Eurozone’s powerhouse economy, something which does not bode well for the outlook of the wider currency union. However, the primary influence on the Euro in coming days is likely to be the dramatically increased sense of political risk, with the potential for shock populist victories in upcoming Eurozone votes. As Tim Riddell, research analyst at Westpac, noted:

‘Juncker’s hard-line response to Renzi over Italy’s budget may have the unintended consequence of pushing Italian voters to reject the referendum as a protest to both government and EU rather than constitutional reforms. The run up to the referendum could see a widening of spreads weighing on EUR.’

Fallout from the result of the US election could see the strength of the ‘Aussie’ falter again in the near future, though, if signs start to point towards a more volatile and inflammatory Trump presidency. Given the sharp swings that markets have seen in the wake of the vote the EUR AUD exchange rate still has scope to rally as the wider implications of this Republican victory unfold.

Current Interbank Exchange Rates

At the time of writing, the Euro Australian Dollar (EUR AUD) exchange rate was slumped at 1.41, while the Australian Dollar Euro (AUD EUR) pairing was making strong gains in the region of 0.70.