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Euro US Dollar (EUR/USD) Exchange Rate Firms as US Politicians Remain Divided over Debt Ceiling

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EUR/USD Exchange Rate Climbs on US Debt Concerns

The Euro US Dollar (EUR/USD) exchange rate is rising this afternoon as US Dollar (USD) weakness supports Euro (EUR) upside by contrast. As a result of the currencies’ strong negative correlation, USD downside buoys the single currency.

At the time of writing, EUR/USD is trading at $1.1616, up slightly from today’s opening levels.

US Dollar (USD) Trends Down as Debt Default Approaches

The US Dollar (USD) edged down against the majority of its peers today, despite a relatively risk-off market mood and expectations that the Federal Reserve will begin tapering bond purchases next month.

A political standoff in the US is likely to be the cause for subdued ‘Greenback’ trading. The country risks defaulting on its debt as Democrats and Republicans remain divided over the best way to raise the debt ceiling.

Neither party wants to default – but time is running out, as whichever method is agreed upon will take time to be passed and implemented. If a solution isn’t reached in time, the US and world economy will likely be thrown into disarray.

Commentators think a default is unlikely, although not impossible. Barclays Plc said, in a note co-authored by analysts at the bank:

‘We still expect that the debt-ceiling impasse will ultimately be resolved, likely through reconciliation…’

Elsewhere, the country’s largest lender, JPMorgan Chase & Co, has begun scenario-planning for how a potential U.S. credit default would affect the repo and money markets, client contracts, its capital ratios, and how ratings agencies would react.

Euro (EUR) Buoyed by US Dollar Downside

The Euro found support against the majority of its peers today as US Dollar weakness bolstered the single currency amidst a lack of Eurozone data.

Tailwinds from last week’s inflation release also limited EUR downside, as investors hope the higher-than-expected data may encourage the central bank to alter its forward guidance in the near term.

Eurozone inflation was expected to reach 3.3% for the month of September, but instead rose to 3.4%, hitting a 13-year high.

Initially, the market response was bearish: CPI caused concern amongst investors as the European Central Bank (ECB) vowed to uphold its ultra-accommodative policy stance, risking further inflation spikes.

However, economists predict that a continual rise will force the ECB’s rate-setters to scale back their bond buying programme, restoring order.

Risk aversion over Chinese economic concerns seem to have done little to affect EUR trading today, despite ongoing power shortages and fears of supply slowdown as electricity is rationed in parts of the country.

EUR/USD Exchange Rate Forecast: Lagarde Speech to Drive Movement?

Looking ahead, a speech from European Central Bank (ECB) President Christine Lagarde may drive movement in the exchange rate tomorrow. If Lagarde hints at tapering in the near-to-mid-term, investors will likely be cheered, lending support to the Euro.

Meanwhile, US data is largely expected to fall, as service activity declines along with the ISM non-manufacturing PMI. The US trade surplus also looks to contract on last month, potentially exerting headwinds.