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EUR AUD Exchange Rate Slumps after ECB Extend QE and Forecast Below-Target Inflation

Political uncertainty in the Eurozone and economic uncertainty in Australia has kept the EUR AUD exchange rate around opening levels today.

  • EUR AUD stuck at opening levels – Italian referendum still weighs on Euro
  • Fitch cuts Italian banking outlook – Agency lowers 2017 outlook to ‘negative’
  • RBA holds interest rates – Markets worried by GDP slowdown
  • EUR AUD exchange rate forecast – Weak AU GDP could boost EUR AUD

The Reserve Bank of Australia (RBA) holding interest rates at 1.5% hasn’t been enough to support the Australian Dollar higher.

EUR Slumps as ECB Announces QE Extension

Update, 14.14, 08/12/2016; The European Central Bank has announced today that it will extend quantitative easing until December 2017, albeit at a reduced rate of €60 billion per month from April. Mario Draghi has commented that this is not a ‘taper’ as that would imply the ECB has plans to reduce QE to zero. Combined with further comments that the forecast inflation rate of 1.7% in 2019 is ‘not really’ close enough to ECB’s target range, this suggests the Governing Council will remain on an easing bias for some time to come, sinking the Euro.

EUR AUD Continues to Advance; Australian Trade Balance Data Disappoints

Update, 10.12, 08/12/2016; The Euro continues to advance versus the Australian Dollar today ahead of the European Central Bank’s upcoming monetary policy meeting. Also assisting the Euro higher is the latest disappointing Australian data. The trade deficit for October was expected to more-than halve from -AU$1227 million to -AU$610 million, but instead markedly widened to -AU$1541 million.

Renzi Confirms Resignation; EUR AUD Holds Gains

Update; Speculation that Matteo Renzi would decide not to resign after all has been short-lived. The Prime Minister tweeted that he would formally step down later this evening. However, the markets have quickly come to overlook the threat of rising Eurozone populism that had them so concerned before the referendum vote, so it seems Renzi’s imminent departure is no longer causing jitters for investors.

EUR AUD Holds Gains as Italian Senate Approves 2017 Budget

Update; The Italian Senate has just approved the 2017 budget by a margin of 173 to 108. Prime Minister Matteo Renzi had stayed on after tendering his resignation in order to see the budget passed and is expected to step down now the matter is completed. Suggestions the government could take a €2 billion stake in failing bank Monte dei Paschi is keeping the Euro supported, even though Renzi’s exit could leave the door open to general elections and further political unrest in the Eurozone.

Euro Bullish after Australian GDP Contraction

Update; EUR AUD has been sent on a bullish charge after Australian gross domestic product figures for the third quarter undermined the ‘Aussie’. Markets had already been fearing a quarter-on-quarter contraction, but the pace of 0.5% was significantly worse than the -0.1% forecast. Year-on-year growth also markedly disappointed forecasts, falling from a downwardly-revised 3.1% to 1.8% instead of 2.2%.

EUR AUD Exchange Rates Weaken as Fitch Downgrades Outlook on Italian Banking Sector

The Euro has remained soft for much of today’s session, with only the Australian Dollar’s weakness preventing EUR AUD from registering significant losses. The fallout from the weekend’s Italian referendum continues to weigh on the Euro, as markets await news on the fate of the Italian banking sector.

Although markets have been fairly calm, the Euro has been undermined by suggestions that there could be a general election in 2017. This would open the door to the Five Star Movement, who many fear could hold a referendum on Italy’s membership of the Eurozone, or possibly even lead the country out of the European Union entirely.

Additionally, the ratings agency Fitch has just updated its credit rating outlook for the Italian banking sector for 2017 from ‘stable’ to ‘negative’. According to the agency;

The “No” vote at the constitutional referendum has further heightened political uncertainty and possibly reduced the capacity to implement economic reforms. The risks from political instability were one factor that contributed to our revision of the Outlook on Italy’s ‘BBB+’ sovereign rating to Negative in October.

Australian Dollar Euro Stuck Around Opening as Markets Await GDP Data

The recent rate freeze from the Reserve Bank of Australia (RBA) was widely expected. The board noted that inflationary pressures remained weak, with business investment muted, but decided that there was no need to loosen monetary policy further. According to the accompanying statement;

Taking account of the available information, and having eased monetary policy earlier in the year, the Board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.

However, even though there are few indications the RBA intends to ease policy any time soon, the Australian Dollar has remained weak thanks to the approach of Q3 GDP data. Markets are worried it could show the economy actually contracted on the quarter; only the fourth time Australia has seen expansion go backwards in 25 years.

EUR AUD Exchange Rate Forecast; Australian GDP Fall Could Boost Euro

Tomorrow’s Eurozone data consists of German industrial production figures for October. These are expected to have improved upon the month and the year at 0.8% and 1.6% respectively.

The key data in regards to EUR AUD exchange rate movement will be the Australian gross domestic product figures, released early tomorrow. Quarter-on-quarter economic growth is expected to have fallen into negative territory, printing at -0.1% after the second quarter’s 0.5% expansion. Year-on-year growth is expected to have slowed from 3.3% to 2.2%.

This is likely to significantly undermine the ‘Aussie’, allowing EUR AUD exchange rates to post strong gains, unless concrete evidence that the Italian banking sector is in serious trouble following the referendum vote were to materialise.

Interbank EUR AUD Exchange Rate

The EUR AUD exchange rate is currently trading in the region of 1.43, while the AUD EUR exchange rate is trending around 0.69.