- Euro US Dollar Climbs to 1.1780 – US Dollar Euro Slides to 0.8485
- Fed Sends Mixed Signals on Monetary Policy – USD Stumbles
- Markets Prepare for Catalonian Independence Announcement – Euro Encumbered
The Euro US Dollar exchange rate inched higher this morning following speculation that Janet Yellen’s replacement as Fed Chair may be a slightly more dovish candidate than previously anticipated.
Fed Governor Jerome Powell is now favoured over Governor Kevin Warsh, though both have been interviewed at the White House.
Ulrich Leuchtmann, Commerzbank’s head of currency research in Frankfurt shared his thoughts:
‘Only a couple of days ago everyone was going for Warsh as successor, who the market saw as standing for a much tighter U.S. policy. Now everyone is thinking that Powell is the more likely choice and thinking of Powell as someone who will do very very gradual policy incrementations. Warsh is seen as sort of positive, Powell as a negative basically – that’s the most important factor at the moment’.
Such an event could signal a dovish shift in Fed monetary policy for 2018, thus reducing demand for the US Dollar.
Also contributing to the ‘Greenback’s’ fall is yesterday’s somewhat cautious announcement from Federal Reserve policymaker Robert Kaplan.
Kaplan, speaking to reporters in El Paso yesterday, stated that the Fed would need to ‘look hard’ at whether it will be raising interest rates in December – something of a surprising statement considering his previous position that he could see ‘two more rate hikes in 2017’ back in May.
‘I need to see some evidence that I think the cyclical forces are picking up enough that eventually it’s likely that inflation will start to build in the future, even if I can’t see it yet’.
It should be noted, however, that Kaplan is not asking for inflation to actually rise, only to see evidence that it will rise before he can support a rate hike in December.
This view is noticeably more cautious than that of current Fed Chairman Janet Yellen’s, who has insisted that inflation, despite confounding expectations, will rise back to the Fed’s 2% target in the near future.
The possibility that members of the bank might be questioning their initial plan for another rate hike before the end of 2017 has driven the ‘Greenback’ down, allowing the Euro to inch ahead, despite the single currency suffering from its own spate of issues.
Euro (EUR) Exchange Rates Encumbered by Weak Retail Sales
Despite remaining slightly ahead of the ‘Greenback’ the Euro has struggled today thanks to some rather disappointing retail sales figures.
Retail sales in the Euro area increased by 1.2% year-on-year in August, down from the previous period’s 2.3% gain and notably below the market forecast of 2.6%.
This being the smallest jump in Eurozone retail trade since September 2016 significantly hurt demand for the Euro, with investors already skittish regarding the situation in Catalonia and the regions impending independence announcement.
It was not, however, enough to push EUR USD into the ‘Greenback’s’ favour.
EUR USD Forecast: Volatility Ahead on Catalonia’s Independence Announcement
The Euro might concede its position in the build-up and aftermath of Catalonia’s referendum announcement.
Both the Spanish PM Mariano Rajoy and Catalonia leader Carles Puigdemont are at something of a stand-off at the moment, with Puigdemont asserting that Catalonia will declare its independence from Spain in ‘a matter of days’.
Such a declaration, however, would not be officially recognised, as the Spanish government counts the referendum as having taken place outside of the law.
This means that Madrid may be pressured into invoking the never before activated ‘article 155’, which would allow the Spanish government to engage and take full control over the autonomous region.
If this occurs then it would spell even more turbulence for the Eurozone and maybe even compel investors to doubt the stability of the bloc itself.
Regardless of the outcome of the referendum, the Euro is likely to drop in reaction to the ensuing uncertainty.