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Euro US Dollar Exchange Rate Surged after Weak US Home Sales Data

With market risk appetite heightened the Euro US Dollar exchange rate has made renewed gains, capitalising on disappointing US housing market data ahead of the weekend.

  • Monte dei Paschi worries continued to weigh on Euro – ECB revised up the lender’s recapitalisation requirements
  • US pending home sales showed surprise contraction – Sign of weakness within US housing market dented US Dollar demand
  • Narrowed advance goods trade deficit predicted to boost ‘Greenback’ – EUR USD exchange rate gains likely to be short-lived
  • Political worries forecast to provoke Euro bearishness – Uncertainty to persist ahead of French and German elections

Confidence in the single currency has nevertheless remained limited, thanks to tensions relating to Italy’s imminent bailout of Monte dei Paschi.

Poor US Home Sales Boosted EUR USD Exchange Rate

Worries over the Italian banking sector were stirred up once again by the European Central Bank (ECB) revising the amount of recapitalisation required for Monte dei Paschi from 5 billion to 8.8 billion Euros. This naturally gave investors some pause, particularly as there have already been doubts circling over the Italian government’s ability to shore up the lender. However, the Euro US Dollar (EUR USD) exchange rate soon recovered from this downside pressure thanks to disappointing US data.

November’s pending home sales unexpectedly contracted -2.5% on the month, rather undermining confidence in the strength of the world’s largest economy. While this disappointing data is unlikely to dissuade the Federal Reserve from raising interest rates further in the coming year this nevertheless weighed on the US Dollar (USD) in the short term. With risk appetite already heightened in the final trading days of 2016 the ‘Greenback’ faltered, leaving the EUR USD exchange rate on an uptrend.

US Dollar (USD) Rally Forecast on Improved Advance Goods Trade Balance

Forecasts point towards a modest narrowing of the US advance goods trade deficit in November, which could encourage a greater degree of confidence in the US Dollar. A positive showing here would offer further incentive to the Fed to maintain its hawkish outlook on monetary policy, signalling that the economy remains in a robust state. Investors will also be interested in the latest jobless claims figures, given that the Fed has placed particular importance on the domestic job market in its policy discussions.

Demand for the Euro could strengthen further, however, in response to the preliminary Spanish inflation figures for December. Expectations are for a moderate increase in domestic inflation, which would bode well for the rest of the currency union. While inflation looks to remain modest any improvement would still shore up the EUR USD exchange rate ahead of the weekend, despite the underlying bearishness of the pairing.

Political Developments Expected to Drive EUR USD Exchange Rate in 2017

In the longer term the single currency is vulnerable to political risk, with market jitters over the outcome of the French and German elections to be expected. Markets remain cautious of the possibility of further populist backlash on the continent and what any major gains for the right wing would mean for the future of the Eurozone. Increasing nationalist rhetoric threatens the integrity of the currency union, throwing the outlook of the Euro into doubt.

Even so, as researchers at BNP Paribas noted:

‘For GDP growth in 2017, we are a little below consensus for the Eurozone, but slightly above consensus for Germany. This implies a greater degree of German outperformance next year than the market expects. Fiscal discipline could loosen more than we expect, supporting stronger growth. A more protectionist stance by the US or less dynamic growth in the economies of Germany’s main trading partners pose the biggest downside risks to our 2018 view.’

Some amount of uncertainty could limit the strength of the US Dollar over the course of January, as the policy implications of president elect Donald Trump remain unclear. Hopes of fiscal stimulus and increased infrastructure investment could see the EUR USD exchange rate soften further, particularly with the Fed on a tightening bias. However, if these promises fail to materialise then the ‘Greenback’ is likely to lose more of its bullish momentum.

Current Interbank Exchange Rates

At the time of writing, the Euro US Dollar (EUR USD) exchange rate was making gains in the region of 1.04, while the US Dollar Euro (USD EUR) pairing was slumped at 0.95.