Euro to US Dollar Exchange Rate Slips from Weekend Levels Despite Lower ‘Safe Haven’ Demand
Despite concerns about a potential currency crisis in Turkey, the Euro to US Dollar (EUR/USD) exchange rate recovered from lows last week. However, as optimism about the US economy persists, the Euro to US Dollar exchange rate could slide again this week.
As the Turkish Lira (TRY) recovered towards the end of last week, EUR/USD was ultimately able to climb from 1.1413 to 1.1447 throughout the week. EUR/USD did briefly touch a low of 1.1304 last Wednesday though, the worst EUR/USD level in over a year.
Since markets opened on Monday though, EUR/USD has slipped again and at the time of writing had already shed last week’s gains and trended in the region of 1.1407.
Investors sold the Euro (EUR) against the US Dollar (USD) on Monday, as hopes about upcoming trade talks between the US and China bolstered demand for the US currency.
On top of this, economists generally expect US monetary policy will continue to tighten while Eurozone monetary policy remains frozen, keeping the US Dollar appealing versus its rival.
Euro (EUR) Exchange Rates Under Pressure as Turkey Jitters Persist
In recent weeks the Turkish Lira (TRY) has plummeted so far that some economists have expressed concern it could lead to a full-blown currency crisis.
The European Central Bank (ECB) and other Eurozone economists have also warned that if the Turkish Lira (TRY) continues to weaken it could have an adverse effect on Eurozone banks.
As a result, the Euro has become slightly correlated to the Lira’s movement over the past week.
The Euro strengthened towards the end of last week when investors bought the Lira back sharply from its cheapest levels. Rising Eurozone inflation also supported the shared currency.
However, as concerns about Turkey’s economy and trade tensions between Turkey and the US persist, the Turkish Lira (TRY) has seen further weakness since markets opened on Monday.
This has kept the Euro under pressure.
Other factors weighing on the Euro include Monday’s underwhelming German PPI stats, and expectations that the ECB will leave Eurozone monetary policy frozen until late-2019 at the earliest. This is keeping the US Dollar more appealing in comparison.
US Dollar (USD) Exchange Rates Sturdy on US Economic Optimism
The US Dollar remains one of the market’s most appealing currencies, due to broad expectations that the US economy will continue to strengthen and the Federal Reserve will keep hiking US interest rates.
As well as a solid domestic outlook, the US Dollar has been benefitting from market demand for ‘safe haven’ currencies amid global geopolitical uncertainties. Uncertainties about the Turkish Lira (TRY), for example, are bolstering US Dollar demand too.
The latest developments in the US-China trade spat have helped the US Dollar too, as a delegation of Chinese officials will travel to the US for trade negotiations. This caused hope that US-China trade tensions could lighten.
Still, the US Dollar’s strength was limited, preventing it from surging versus the Euro, as the negotiations are expected to be quite low-level. According to Yukio Ishizuki, senior currency strategist at Daiwa Securities:
‘The US-China negotiations…will not be between high level officials and are therefore unlikely to produce immediate results. However, the markets will be hoping that the talks pave the way for negotiations at a higher level,’
Euro to US Dollar (EUR/USD) Forecast: Central Bank Speculation in Focus
Part of the reason the Euro to US Dollar (EUR/USD) exchange rate has struggled to hold its ground is due to perceived monetary policy divergence between the Eurozone and US.
The European Central Bank (ECB) is not expected to hike Eurozone interest rates at all until the second half of 2019 at the earliest, while the Federal Reserve has already hiked US interest rates notably and has indicated it will continue to do so.
With the ECB leaving rates frozen and the Fed hiking them further, the perceived divergence has indicated to investors that the US economy will keep steaming ahead of the Eurozone economy for some time, which has left the US Dollar persistently more appealing.
As a result, developments in the Eurozone or US Central Bank outlooks will be influential to the Euro to US Dollar exchange rate this week.
Market focus will likely remain on geopolitical developments regarding Turkey and US-China trade tensions for the first half of the week.
Then, the Federal Reserve’s latest meeting minutes on Wednesday could be highly influential if they surprise investors.
Following that, the Eurozone’s August PMI stats due on Thursday could influence the Eurozone economic outlook, ECB bets, and the Euro to US Dollar (EUR/USD) exchange rate.