EUR USD exchange rates are weak as markets await the inauguration of Donald Trump, with investors hoping for clues as to his spending plans.
Afternoon Update, 20th Jan; The Euro has been able to recover slightly. Numerous protests against Donald Trump have already begun across America – and the world – which could threaten to disrupt the inauguration.
Investor Focus on Potential for US Inflation Growth Undermines EUR USD Exchange Rates
EUR USD exchange rates have weakened today as investor focus returns to soon-to-be President Donald Trump’s potential to accelerate US inflation. Bond yields are edging higher in anticipation that Trump will deliver on his promises to stimulate the US economy.
This could potentially stoke inflationary pressures in the Eurozone; the Fed will respond to rising US prices by hiking rates, strengthening the US Dollar. A rising ‘Greenback’ would weigh on the Euro, working to enhance the effects of Eurozone quantitative easing. The weaker purchasing power of the Eurozone fuels price growth across the currency bloc.
However, until those effects trickle through – or if unforeseen complications stymie Eurozone inflation growth – policy divergence between the Federal Reserve and the European Central Bank (ECB) will increase. The difference in interest rates will become even more marked, prompting investors to undertake carry trades.
Traders will borrow Euros at a low interest rate and buy US Dollar-denominated assets, which have a high yield compared to those of the currency bloc. This flood of demand for the US Dollar at the expense of the Euro will work to keep the common currency on the decline.
Thus, EUR USD exchange rates are edging down today.
US Dollar Advancing on Market Hopes Trump Speech will Contain Stimulus Clues
Following his inauguration this afternoon, Donald Trump will give his first speech as US President. Investors have high hopes for his administration, largely due to his campaign promises to greatly increase the amount of money spent on fiscal stimulus and infrastructure.
His plans could raise employment and improve wages, therefore leading to rising consumer prices in response to rising demand. This would prompt the Federal Reserve to up the pace of their monetary policy normalisation. Higher interest rates would boost the US Dollar.
Investor hopes of this can be seen in the rise in US bond yields since Trump’s shock election victory. The yields on long-dated US bonds have been on the rise because investors are expecting inflation to increase; if prices increase strongly before the bond is repaid, the money they get back on maturity is worth less in real terms. Therefore, investors demand a stronger return from the bonds they hold to make it worthwhile doing so.
The prospect of tighter Fed monetary policy is therefore pushing EUR USD exchange rates lower.
EUR USD Exchange Rates Forecast to Weaken Further if Trump Talks of Fiscal Stimulus
Should Donald Trump confirm, or at least hint, that his promises of huge fiscal stimulus will be follow through, EUR USD exchange rates are likely to slump as investors rush into the ‘Greenback’.
If the President neglects the topic, or backtracks on his claims, the Euro could post a bullish recovery as investors re-evaluate their bets on higher inflation.
Interbank EUR USD Exchange Rates
At the time of writing, EUR USD exchange rates were trending around 1.06, while USD EUR exchange rates were trading around 0.94.