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EUR USD Exchange Rate Softens ahead of Italian Referendum

long term Pound Euro forecast

  • EUR USD Slides – Investors fear repercussions of Italian referendum.
  • US Unemployment Drops – US Dollar strengthened by better than expected data
  • ECB Policy Decision on Thursday – Euro likely to decline as markets predict further monetary easing from central bank.

The Euro US Dollar (EUR USD) exchange rate dropped by around half a cent on Friday afternoon as investors became increasingly concerned about the Italian referendum.

Euro US Dollar (EUR USD) Weakened by Italian Political Crisis

The Euro took a dive at the end of last week’s session as markets fear the damage the Italian referendum may cause the Eurozone.

Investors are concerned about Prime Minister Matteo Renzi’s vow to resign if his referendum on constitutional reform is defeated as it looks increasingly likely that it will be rejected, which may lead to a change in government. As Jaisal Pstakia, investment manager at Heartwood Investment Management elaborates;

‘In all probability the Italian electorate is likely to reject Prime Minister Renzi’s proposals for constitutional reform… If a general election were to happen, the likelihood is that it would result in a fragmented coalition government that would find it difficult to pass legislation, owing to the very parliamentary system that Renzi is trying to reform.’

There are worries that Renzi’s resignation could also cause an economic crisis in Europe as Italy’s struggling banking sector continues to be a sore spot for the Eurozone, with a change in government likely to delay much needed economic reforms outlined by Renzi.

US Dollar Bolstered by Improvement in Employment

Meanwhile the US Dollar enjoyed a slight uptick in demand on Friday afternoon as the latest US unemployment figures showed an unexpected improvement.

Unemployment dropped to a new nine-year low as it fell from 4.9% to 4.6% in October, bolstering market confidence that the Federal Reserve will raise interest rates in December, with odds of a rate hike hovering around 95%.

The near certainty of the December rate hike now has investors beginning to speculate on potential rate increases in 2017 as Paul Ashworth, chief US economist at Capital Economics explained;

‘A December rate hike is coming and, assuming that we see a major fiscal stimulus passed in the first half of next year, we expect an additional 100 basis points of tightening from the Fed next year, taking the fed funds target range to between 1.50% and 1.75% by end-2017.’

EUR USD Exchange Rate Forecast: ECB Policy Decision Likely to Weigh on Euro

The EUR USD exchange rate is likely to driven closer to parity next week as the European Central Bank (ECB) meets for its next policy meeting.

The central bank is widely predicted to announce additional economic stimulus following the meeting as it seeks to extend its quantitative easing programme past March 2017 as ECB President Mario Draghi targets a 2% inflation rate.

Despite some fierce criticism from banks over recent months many sceptics have now accepted that an extension to the Bank’s monetary easing is necessary due to the heightened political risks in the Eurozone.

There are growing concerns about the rise of populism in Europe following ‘Brexit’ and Donald Trump’s victory in the US election leading that next year’s general elections in both France and Germany could lead to a further break-up in the EU should parties such as Marine Le Pen’s Nation cause a political upset.

Current Interbank Exchange Rates

At the time of writing the EUR/USD exchange rate was trending around 1.06 and the USD/EUR exchange rate was trending around 0.93.