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Euro US Dollar Exchange Rate Trends Narrowly after Disappointing German Production

With hopes over the future of the Italian banking sector in a state of flux the Euro US Dollar exchange rate has seen some volatile movement.

  • Hopes raised over prospect of ESM loan for Italian banks – Euro weakened after Italian Treasury denied rumours
  • Widened US trade deficit limited US Dollar demand – World’s largest economy continued to show mixed signs of strength
  • Odds of imminent Fed rate hike remained high – December rate hike largely priced into EUR USD exchange rate
  • Dovish ECB meeting forecast to dent Euro confidence – Extension of QE program could weaken single currency

Despite markets widely expecting the Federal Reserve to raise interest rates imminently the appeal of the US Dollar has remained muted at this juncture.

Continued Speculation over Future of Italian Banking Sector Kept Euro (EUR) Exchange Rates Volatile

In another discouraging sign for the Eurozone economy, October’s German industrial production figures fell short of forecast. Clocking in at growth of 1.2% rather than 1.6% on the year this suggested that the Eurozone’s powerhouse economy remains in a softer state than hoped. As Carsten Brzeski, Chief Economist at ING, noted:

‘Looking beyond the short term, the weakness of German investments remains striking. According to latest surveys, investment is still sluggish due to the lack of demand and skilled workers but not due to problematic access to financing. It seems as if to unleash the entire investment potential, German corporates could currently use some government support.’

However, this disappointment was somewhat overshadowed by a surge in confidence over the future of Italy’s banks. Rumours circulated that the Italian government could be considering an application for a loan from the European Stability Mechanism (ESM), a prospect which helped to allay fears that the struggling Monte dei Paschi could collapse. While this boosted the Euro (EUR) on Wednesday morning, though, it was ultimately not long before the Italian Treasury and ESM both denied these reports. As a result, the Euro US Dollar (EUR USD) exchange rate soon returned to a downtrend.

US Dollar (USD) Trended Lower on Disappointing Trade and Productivity Data

Sentiment towards the US Dollar (USD) has been a little volatile, meanwhile, thanks to the mixed nature of recent domestic data. Although factory and durable goods orders were found to have risen bullishly on the month in October, pointing towards robust domestic demand, the picture was not entirely positive.

Confidence was undermined as the latest trade deficit widened further than forecast from -36.2 billion to -42.6 billion and non-farm productivity for the third quarter failed to pick up as expected. This indicated that the underlying fundamentals of the US economy are not as solid as the Federal Reserve might like, although markets remain certain of an imminent rate hike nevertheless.

Investors have effectively priced in a December interest rate move, however, which is somewhat limiting the upside potential of the US Dollar. This could help to shore up the EUR USD exchange rate, particularly in the absence of further bullish US data.

EUR USD Exchange Rate Forecast: Dovish ECB Meeting Could Dent Euro Demand

Some sharp moves for the EUR USD exchange rate are expected ahead of the European Central Bank’s (ECB) December policy meeting. Predictions point towards policymakers extending the quantitative easing program by a further six months, at the least, with the ECB likely to maintain a more dovish outlook. While this could dampen the appeal of the single currency, however, the potential for a downside surprise is generally limited.

Should policymakers adopt a more optimistic view on monetary policy and the domestic economy the Euro could trend higher. Any indications that the ECB stands ready to support the Italian banking sector may also encourage greater demand for the single currency, as this would be seen to diminish the risks surrounding the current situation in Italy. Providing that President Mario Draghi does not adopt an overly dovish tone then the EUR USD exchange rate could well return to an uptrend ahead of the weekend.

Current Interbank Exchange Rates

At the time of writing, the Euro US Dollar (EUR USD) exchange rate was trending narrowly in the region of 1.07, while the US Dollar Euro (USD EUR) pairing was trending around 0.93.