Fears of Difficult Coalition Talks Lead to EUR/USD Exchange Rate Decline
The Euro has fallen by -0.3% against the US Dollar (EUR/USD) today, with the pairing sliding because of high tensions over Germany’s political future.
The country has been without solid leadership since the federal election in late 2017, as no one party achieved the required majority.
Long-time Chancellor Angela Merkel attempted to form a coalition with the Green and FDP parties, but talks collapsed in late-November when the FDP pulled out.
Since then, Merkel has been trying to form another ‘grand coalition’ with her previous rivals (and partners), the SPD party.
Problematically, however, both parties have significant differences in their plans for Germany, so the worry is that talks could run into roadblocks again.
Higher Eurozone Confidence Fails to Raise EUR/USD Exchange Rate
The Euro hasn’t seen much support from Eurozone data today, although it has generally been supportive of the single currency bloc.
Eurozone business confidence in December has increased, as has consumer confidence and overall economic confidence.
The only major negative reading has been for consumer inflation expectations, which have declined slightly.
Lower inflation reduces the pressure on the European Central Bank (ECB) to consider hiking interest rates, so the expectations drop has concerned traders.
US Dollar to Euro Exchange Rate (USD/EUR) Rises on Fed’s Cautious Optimism
The US Dollar has advanced against the Euro today; this is down to Euro weakness as well as optimism about the US economy in 2018.
Federal Reserve official John Williams has recently been discussing Fed policy for the year, stating that there may be at least three interest rate hikes in 2018.
Problematically, however, Williams has added that the Fed could go either way in monetary policy during the year.
Traders have mainly been paying attention to the ‘three rate hikes’ comment, which explains why the US Dollar remains above the Euro at present.
Euro to US Dollar Forecast: EUR Rally Possible on Eurozone Unemployment Drop
The Euro could be greatly impacted by two data releases out on Tuesday morning, covering Germany and the overall Eurozone.
In the former case, Germany’s balance of trade for November will be announced.
The expectation is that this will show an expansion of the current German trade surplus, from €18.9bn to €21.5bn.
Germany’s surplus reading previously showed an alarming drop from €24.1bn to €18.9bn for October, so any sign of a recovery could lead to a Euro to US Dollar rise.
In similarly supportive data, Eurozone unemployment is predicted to have reduced from 8.8% to 8.7% in November.
Lower unemployment could lead to wage growth and eventual higher inflation, so a forecast-matching unemployment rate drop may raise demand for the Euro.
US Dollar traders will be watching this evening’s Federal Reserve speeches, which will include remarks on inflation targeting and the national economic outlook.
Fed official Raphael Bostic will discuss economic outlook, while Eric Rosengren and John Williams will both be speaking at an inflation targeting conference.
If the US Dollar is to appreciate, traders may be looking for an optimistic economic outlook and confidence that US inflation will stay high in the months ahead.