- Euro US Dollar Exchange Rate Hits 1.04 as end of 2016 approaches – Lowest level since 2003
- Traders Expect US Rate Hike from Fed – 25 basis point increase expected a year after 2015’s hike
- Fed Meeting Impresses – Fed hints at three 2017 rate hikes
- Forecast: Eurozone Inflation Stats on Friday – Analysts expect month-on-month contraction
Euro US Dollar Exchange Rate Hits Fresh 2016 Lows
The Euro US Dollar exchange rate failed to emerge from its worst levels all year on Thursday afternoon, nearing the value of 1.03 for the first time since 2003.
Demand for the Euro was weighed down throughout the day by concerns that debt relief talks between Greece, the IMF and the Eurogroup would fall through, which investors perceived as a new factor of Eurozone uncertainty.
The US Dollar continued to perform solidly throughout the day despite mixed US ecostats being published during the American session.
November’s US Consumer Price Index (CPI) results came in at 1.7% year-on-year as expected, but the figure excluding food and energy failed to improve to 2.2% as forecast.
Markit’s US manufacturing PMI also disappointed, improving from 54.1 to 54.2 rather than printing at 54.5.
(Previously updated 12:59 GMT 15/12/2016)
The Euro US Dollar exchange rate plummeted on Wednesday evening, following the outcome of the Federal Reserve’s final 2016 policy decision.
As was widely forecast, the Fed opted to hike US interest rates by 25 basis points, taking it from 0.50% to 0.75%. This was expected – the US Dollar’s main source of bullishness was the Fed’s unexpectedly hawkish 2017 outlook.
Fed officials, including Chairwoman Janet Yellen, indicated that there could be as many as three US interest rate hikes in 2017 if the US economy continues to perform well under the Trump administration.
However, uncertainty about Trump’s fiscal policies remains a possible downside factor. After 2016’s rate outlook was downgraded from four rate hikes to just one, this possibility limited the US Dollar’s performance slightly.
Despite this, the Euro’s own weakness allowed EUR USD to fall to 1.04 – its lowest value since 2003. Concerns about Greek debt relief talks falling through as new feuds emerged between Greece, the Eurogroup and the IMF.
(Previously updated 16:33 GMT 14/12/2016)
Euro US Dollar Exchange Rate Edges Higher as Traders Anticipate Fed Meeting
Demand for the Euro improved later in the day while the US Dollar weakened due to some underwhelming US ecostats.
The new Italian Prime Minister, Paolo Gentiloni, won a confidence vote from the upper house of the Senate after being picked by Italy’s President following ex-PM Matteo Renzi’s resignation last week.
This relieved some of the political uncertainty in the Eurozone and improved the Euro’s underlying trade factors slightly.
Meanwhile, the US Dollar was weakened slightly by underwhelming US advance retail sales results and industrial production figures for November.
As markets have widely priced in a US interest hike from the Fed’s meeting, investors are instead looking ahead to what the Fed may do in 2017. As a result, these disappointing ecostats dented the US Dollar slightly.
(Published 10:56 GMT 14/12/2016)
The Euro US Dollar exchange rate trended largely flatly on Tuesday as the day’s ecostats were unable to shake the pair ahead of the last Fed meeting of 2016, at which policymakers are expected to confirm a US interest rate hike.
EUR USD has recovered around a cent from Monday’s 2016 low of 1.05 and has trended flatly above the level of 1.06 since then. With a Fed rate hike largely priced in, EUR USD may not fall much if borrowing costs are adjusted.
Euro (EUR) Flat on Negative Correlation with US Dollar (USD)
Demand for the Euro has been mixed this week. As the currency with one of the strongest negative correlations to the US Dollar, the Euro’s movement has been muted as traders readjust and correct their positions on the US Dollar ahead of Wednesday’s highly anticipated Fed meeting.
Domestic factors for the Euro haven’t been entirely bullish either. Tuesday’s session saw the publication of Germany’s final November Consumer Price Index (CPI) results, which came in as expected at 0.1% and 0.8% month-on-month and year-on-year.
Eurozone employment stats for Q3 also met expectations, hitting 1.2% year-on-year. ZEW’s German current situation survey for December beat expectations by improving to 63.5 while Germany’s economic sentiment failed to improve to 14 as expected, remaining at 13.8.
The Eurozone’s overall economic sentiment improved from 15.8 to 18.1 in December according to ZEW’s survey, but due to the overall mixed nature of Eurozone news and the strength of the US Dollar the shared currency failed to benefit.
Wednesday’s October industrial production results for the Eurozone also disappointed, falling to 0.6% year-on-year and contracting by -0.1% month-on-month.
An ongoing banking crisis in Italy has also kept the Euro weak following last week’s Italian political uncertainty.
While market hopes that Italy’s banking sector could recover improved on Wednesday, the increasing proximity of the Federal Reserve’s Wednesday meeting weighed on EUR trade.
US Dollar (USD) Readjusts in Corrective Trade as Fed Rate Hike Expected
This week’s US data has been relatively low-influence thus far this week, but even if it wasn’t traders were still likely to brush over them in jittery anticipation of Wednesday’s highly anticipated Federal Reserve meeting.
The Fed is widely expected to be hiking the US interest rate by 25 basis points, from 0.50% to 0.75%, on Wednesday evening during the American session.
Market bets of a Fed rate hike have been over 90% for weeks now and have been over 95% in the last week. As the majority of investors expect a rate hike, this expectation has already been priced into the US Dollar’s current value.
This has accounted for much of the US Dollar’s strength in recent weeks and has been among the main reasons for Monday’s 2016 low in the Euro US Dollar exchange rate.
However, with the high importance of the upcoming Fed meeting in focus, a rate hike being priced into the US Dollar has also prevented the US Dollar from benefitting from much else this week.
Euro US Dollar Exchange Rate Forecast: What to Look Out For in Fed Meeting
Unsurprisingly, the biggest event on the short-term horizon is tonight’s Federal Open Market Committee (FOMC) meeting. Here’s why it’s important to pay attention to even if the outcome is priced in;
With analysts widely expecting a rate hike, markets are unlikely to move much in the US Dollar’s favour on the rate hike alone. Instead, it will be the tone Fed officials take that determines how bullish USD will be this week.
If the Fed indicates that there’s a good chance of more interest rate hikes in the coming year to go alongside President-elect Trump’s reflationary fiscal policy, the US Dollar could soar and push EUR USD lower.
However, the Fed may instead opt for a vaguer outlook amid all the uncertainty surrounding Trump’s premiership. Kit Juckes from Societe Generale stated;
‘Given that the single biggest source of economic uncertainty hanging over the US economy right now is the outlook for fiscal policy -what will President Trump do? – the temptation to be very, very bland in the statement that accompanies a thoroughly-discounted rate hike at 7pm GMT, is likely to be irresistible.’
In this scenario, the US Dollar may even weaken slightly by the end of the week as investors begin to fear another long wait before the next US interest rate hike.
At the time of writing, the Euro US Dollar exchange rate trended in the region of 1.06, while the US Dollar Euro exchange rate traded at around 0.94.