With the odds of a December Fed interest rate hike already mostly priced into the ‘Greenback’ the Euro US Dollar exchange rate has been able to make some gains at the start of the week.
- Nicolas Sarkozy knocked out of race for French presidency – Markets optimistic despite chances of further populist upsets
- High odds of imminent Fed interest rate hike priced into US Dollar – EUR USD exchange rate regains ground thanks to limited ‘Greenback’ upside potential
- Stronger Eurozone consumer confidence predicted to boost Euro – Improved domestic sentiment could offer reassurance to investors
- US durable goods orders forecast to maintain bullish USD outlook – Signs of economic strength to keep Fed on track for December rate move
As the political situation in the US has quietened down somewhat, at least for the time being, investors have been inclined to take a more neutral view of the US Dollar.
French Election Developments Boosted Euro (EUR) Exchange Rates
Comments from European Central Bank (ECB) President Mario Draghi diminished the appeal of the Euro (EUR) ahead of the weekend, stoking the belief that the central bank will extend its quantitative easing program in December. Political pressure also mounted on the single currency, given Germany’s continued hard-line on Greek debt relief and developments in the race for the French presidency. Former Prime Minister François Fillon unexpectedly emerged as the front-runner for the Republican party, taking a greater share of the vote than the more moderate Alain Juppé. The elimination of Nicolas Sarkozy was greeted positively, offering the Euro US Dollar (EUR USD) exchange rate a boost on Monday morning.
Market volatility surrounding the incoming Trump administration began to ease somewhat, with investors inclined to sit tight and await greater detail as to the economic impact of the Republican victory going forward. With high odds of an imminent Federal Reserve interest rate hike already largely priced into the US Dollar (USD) support for the currency has thus been a little limited at the start of the week.
EUR USD Exchange Rate Forecast to Find Support on Improved Eurozone Consumer Confidence
Further downside pressure for the EUR USD exchange rate looks set ahead of the Italian constitutional referendum in two weeks’ time, with Prime Minister Matteo Renzi looking set to suffer a defeat. As Renzi has pledged to resign in the event of his reforms to the power of the Senate being turned down this this could plunge the Eurozone into a fresh wave of uncertainty, particularly with the current rise of populist sentiment threatening to shake up other member states. As a result the Euro is expected to see only limited upside bias in the near future, with the integrity of the currency union seen to be in fresh doubt.
In the nearer term, however, the Euro could receive a boost from the November Eurozone Consumer Confidence Index. This is expected to show a modest improvement on the month, pointing towards a slightly more optimistic domestic outlook. Even so, if confidence does not show signs of strengthening, given the major market turmoil of the last few weeks, the EUR USD exchange rate could return to a downtrend.
Strong US Goods Orders to Boost US Dollar (USD) Demand
Although political developments are likely to remain in focus the US Dollar could find additional support on the back of the week’s domestic data. Forecasts point towards a solid uptick in durable goods orders for October, which are expected to rise from -0.3% to 0.8%. This would further the impression of robustness within the world’s largest economy, offering further encouragement to the Fed to return to the monetary tightening cycle before the end of the year.
The appeal of the ‘Greenback’ could also strengthen in response to the Fed’s November meeting minutes. These are expected to reinforce the view that policymakers are readying to make a move on interest rates, although the odds of a hike are already largely priced into the ‘Greenback’. As researchers at BNP Paribas noted:
‘Barring significant shocks, we expect the Federal Open Market Committee (FOMC) to raise rates by 25bp at its 12-13 December meeting. We expect the [November] minutes to increase the perception that a majority of FOMC members want to hike in December; we believe the probability of a hike to be around 80%.’
Current Interbank Exchange Rates
At the time of writing, the Euro US Dollar (EUR USD) exchange rate was trending higher in the region of 1.06, while the US Dollar Euro (USD EUR) pairing was slumped around 0.94.