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EUR AUD Rallies from Two-Month Low Following Pessimistic Outlook for Australia Dollar

The Euro Australian Dollar (EUR AUD) exchange rate strengthened this morning as economists forecast the ‘Aussie’ may crash in 2018.

Australian Dollar (AUD) to Slump in 2018?

The Australian Dollar came under a little pressure this morning following an unfavourable outlook for the antipodean currency Westpac’s chief economist, Bill Evans.

One key reason for this unfavourable forecast is that Evans expects that the Reserve Bank of Australia (RBA) will continue to abstain from raising interest rates over the next year as Westpac predicts that Australia growth will peak at 2.5% in 2018, falling short of the 3.25% target of the RBA, with Evans explaining;

‘While there is no way of assessing markets’ direct expectations for growth in Australia the fact that a 0.25% rate hike is now factored in by August next year implies that markets are expecting a much stronger growth environment in Australia than our view. We continue to expect rates to remain on hold through 2018.’

Evan’s outlook also suggests that the ‘Aussie’ will be undermined by renewed weakness in commodity markets next year, saying;

‘Through 2018 we expect a 26% fall in the bulk commodity Index, including a 30% fall in the iron ore price. That adjustment will be underpinned by a marked slowdown in Chinese industrial demand, as the government resumes its rebalancing policies.’

Euro (EUR) Advance Slowed by Lacklustre Inflation

Meanwhile the Euro found its advance this morning somewhat slowed by the release of the Eurozone’s latest Consumer Price Index (CPI).

According to data released by Eurostat the Eurozone’s inflation rate slipped from 1.4% to 1.3% last month, reaching its lowest levels in 2017 so far and edging inflation further away from the European Central Bank’s (ECB) target rate of 2%.

The drop in inflation last month is likely to further sink any hopes of the ECB moving towards the tightening of its monetary policy in the near future, with policymakers from the central bank frequently pointing to softening inflation as a sign that the Eurozone’s economy is not yet ready for higher interest rates.

Although most analysts are already predicting that the bank would vote to leave interest rates unchanged at Thursday’s meeting, there has been some recent speculation that the ECB may be considering the possibility of tapering its expansive stimulus package over the coming months, however with the release of today’s data that now looks a lot more unlikely.

EUR AUD Forecast: German Economic Sentiment to Fall?

Looking ahead the EUR AUD exchange rate may stumble even further on Tuesday with the release of Germany’s latest Economic Sentiment Index, which is expected to have slipped from 18.6 to 17.5 in July as those economists surveyed are expected to become increasingly pessimistic in their outlook to Germany’s economic potential over the coming months.

Meanwhile the Australia Dollar may also struggle tomorrow as the RBA releases the minutes from its most recent monetary policy meeting, with the minutes expected to reaffirm the bank’s decision to leave interest rates on hold for the foreseeable future.

Current Interbank Exchange Rates

At the time of writing the EUR AUD exchange rate was trending around 1.4645 and the AUD EUR exchange rate was trending around 0.6826.