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Euro to Australian Dollar Exchange Rate Surges, EUR/AUD Forecast Higher Unless Trade Concerns Lighten

Euro to Australian Dollar Exchange Rate Advances on US Trade Protectionism Fears

While its gains have been limited by dovishness from the European Central Bank (ECB), the Euro to Australian Dollar (EUR/AUD) exchange rate has put in solid gains over the last week due to risk-off movement weakening the risky Australian Dollar (AUD).

EUR/AUD opened the week at the level of 1.5673 and spent the latter half of the week climbing after wide fluctuations. EUR/AUD trended near a weekly high of 1.5874 on Friday, at the time of writing.

The pair’s gains have been largely due to ramped up trade protectionism rhetoric from the US Presidential administration, as well as other factors like political uncertainty weighing on risk-sentiment.

The US Presidency has taken a firmer stance on trade in recent weeks and the new pick for US economic adviser, Larry Kudlow, has worsened concerns by suggesting that Chinese trade needed a more tough response from the US.

China has responded to the possibility of a US-sparked ‘trade war’ by indicating it would hit back. As China is Australia’s biggest trade partner this made ‘Aussie’ investors particularly anxious.

Kudlow further concerned investors of risky currencies on Thursday, when he indicated he favoured a strong US Dollar (USD).

Risk-sentiment has been further pressured by political uncertainties in major economies like the US and Japan over the past week. Essentially, broad Australian Dollar weakness made it much easier for EUR/AUD to sustain gains.

Euro (EUR) Exchange Rates Fail to Capitalise as European Central Bank (ECB) Dovishness Weighs

The Euro to Australian Dollar (EUR/AUD) exchange rate could have seen stronger gains over the past week if the Euro (EUR) had not been pressured by market disappointment in the Eurozone inflation outlook.

European Central Bank (ECB) officials including President Mario Draghi and Chief Economist Peter Praet have taken dovish stances on Eurozone inflation in the past week.

Draghi asserted that even if the ECB does not ramp up its quantitative easing (QE) scheme, the bank was willing to continue its bond-buying program until Eurozone inflation was more sustained.

Praet followed on Friday with optimistic but dovish comments. He noted that there was still slack in Eurozone job markets and that if underutilised capacity is tapped into, the Eurozone economy could continue to see strong growth for longer.

However, this would also mean that it could take longer than previously expected for Eurozone inflation to build towards the ECB’s target of near 2%.

Eurozone inflation concerns worsened further slightly following the publication of the bloc’s final February Consumer Price Index (CPI) results. Eurozone inflation was slightly weaker than projected year-on-year, slipping from 1.3% to 1.1% rather than the forecast 1.2%.

Euro to Australian Dollar (EUR/AUD) Forecast: Risk-Sentiment and US Trade News in Focus

Some notable Eurozone and Australian ecostats will be published in the coming week. This includes Eurozone trade, confidence surveys and Markit PMI projections, as well as Australian job market results.

EUR/AUD gains have been due to risk-off movement and market concerns about US trade protectionism though, so risk-sentiment will likely continue to be a major drive for the pair next week.

If markets become more anxious about the possibility of the US and China becoming embroiled in a ‘trade war’, the Australian Dollar is likely to remain weak and this could make it easier for EUR/AUD to hold its recent gains.

In particular, risky currencies will remain unappealing if the US Presidential administration continues to ramp up protectionist rhetoric, or if political uncertainties in the US or Japan worsen.

As for the Euro, it is most likely to be driven by any further comments from European Central Bank (ECB) officials, but Tuesday’s Eurozone consumer confidence projections and Thursday’s Markit PMI projections could also prove influential.