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Euro to US Dollar (EUR/USD) Exchange Rate Dips as Fears Grow about Populist Italian Leadership

Uncertainties about Italian Coalition Government Cause EUR/USD Exchange Rate Losses

The Euro (EUR) has made a minor loss against the US Dollar (USD) today, as uncertainty about the next Italian government continues to grow.

There was initial optimism when it was reported that the Five Star Movement and League parties were planning a coalition.

More recently, however, there have been fears that the coalition could turn Eurosceptic, leading to more pressure being placed on the EU and the Eurozone.

The latest policy plans suggest that the coalition will question continued Eurozone membership, as well as whether existing budget deficit measures can be changed.

Such objectives go against the ideals of the Eurozone; most recently European Commission Vice President Valdis Dombrovskis has warned that:

‘[Fiscal discipline and lower debt are important.] This is our message to the new government. It’s important to stay the course’.

Rising German Producer Prices Fail to Trigger Euro to US Dollar (EUR/USD) Exchange Rate Rise

Today’s Eurozone data has been broadly positive, but not enough to trigger a Euro to US Dollar (EUR/USD) exchange rate rise.

German producer prices and wholesale prices have both risen in April, which increases the chances that overall Eurozone inflation levels will rise in the future.

Higher inflation is seen as a critical requirement for the European Central Bank (ECB) to consider higher interest rates, as without it there is little pressure to act.

US Dollar to Euro Exchange Rate Steady after Contrasting Fed Statements

The US Dollar (USD) has made a minimal advance against the Euro (EUR) today; additional gains have been prevented by the latest Federal Reserve speeches.

On the plus side, Fed policymaker Robert Kaplan has hinted that he supports higher interest rates because US unemployment may have reached capacity.

This is the level at which there is unlikely to be a major drop in the future jobless rate, which increases the likelihood of the Fed considering higher interest rates.

More cautiously, however, fellow Fed member Loretta Mester has warned that there should not be an immediate rush to deregulate the US banking sector.

Ms Mester’s comments concern the measures put in place after the late 2000’s financial crisis, which are credited with increasing banking sector stability.

The argument is that while removing the measures could boost economic growth, they would also risk recreating conditions for a financial crash.

Euro to US Dollar Exchange Rate Forecast: Are Further EUR/USD Losses ahead on Eurozone PMI Stats?

The Euro (EUR) remains at risk of making more pronounced losses against the US Dollar (USD) on the coming Wednesday, when Eurozone PMI data will be released.

The initial readings for May are predicted to show slowing economic activity across the Eurozone, which could trigger a EUR/USD exchange rate decline.

The US Dollar might be influenced more immediately by statements from Federal Reserve officials Lael Brainard and Robert Kaplan this afternoon.

If Mr Kaplan reiterates previous his optimism and Ms Brainard is similarly positive then the USD could rise.