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Euro US Dollar (EUR/USD) Exchange Rate Extends Slide as Italy Remains Defiant Over Budget Worries

Worries Over Italian Budget Conflict Weigh on Euro US Dollar (EUR/USD) Exchange Rate

Ongoing market concerns over the Italian budget and the government’s conflict with EU officials kept the Euro (EUR) under pressure today.

Comments from Economy and Finance Minister Giovanni Tria failed to encourage any particular confidence in the single currency, even as he called for a ‘constructive discussion’ with the EU.

Investors remain wary of the prospect of a fresh Italian debt crisis, although the odds of an Italian exit from the Euro have still diminished.

As neither the EU nor Italy looks willing to back down on the issue EUR exchange rates seem set to remain under pressure in the days ahead.

Analysts at Scotiabank noted:

‘The EUR tone remains soft as focus remains on Italian fiscal policy and markets maintain pressure on Italian bonds; EU officials are concerned that Italy’s mix of high debt and slow growth is unbalanced but Italian officials will submit a formal draft plan next Monday as Rome stresses that it will not back down. The face-off may continue to weigh on EUR sentiment in the next few weeks.’

A widening of the German trade surplus failed to give the Euro a boost, meanwhile, with the improvement fuelled by a sharp -2.7% contraction in imports.

With demand for German produce still appearing limited in the midst of slowing global growth and trade war concerns the Euro to US Dollar (EUR/USD) exchange rate remained on the back foot.

US Dollar (USD) Bullishness Eases in Response to Fed Policymaker Comments

The US Dollar (USD) lost some of its bullishness over the course of the day, however, thanks to comments from Dallas Fed President Robert Kaplan.

As Kaplan noted that the Federal Reserve should adopt a patient and gradual pace of interest rate hikes until at least June 2019 this dented USD exchange rates.

While markets remain confident that another interest rate hike is on its way before the end of the year this more cautious tone still weighed on US Dollar sentiment.

A weakening in the NFIB small business optimism index also helped to limit the losses of the EUR/USD exchange rate this afternoon.

Softening Inflation to Diminish US Dollar (USD) Exchange Rate Strength

Thursday’s US consumer price index data may offer the EUR/USD exchange rate a rallying point, with forecasts pointing towards a dip in the headline figure.

If the annual CPI eases from 2.7% to 2.4% in line with market expectations this could undermine the case for a fourth 2018 Fed interest rate hike further.

While the CPI is not the Fed’s preferred measure of inflation any slowdown here may still give policymakers cause for caution.

However, if the core CPI shows a modest acceleration on the year this could help to diminish any negative impact on the US Dollar.

Solid jobless claims data may also limit the potential for EUR/USD exchange rate gains, given the relative strength of the US labour market.