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Sharp Narrowing of Eurozone Surplus Weighs on Euro US Dollar Exchange Rate

Despite its strong start to the week the Euro US Dollar exchange rate returned to a downtrend after a disappointing Eurozone current account report.

The surplus narrowed from 46.9 billion in December to just 2.5 billion in January, undermining confidence in the domestic economy.

A slump in exports contributed to the narrowing of the surplus, pushing the figure to its lowest level in three years.

This weaker showing added to the case for the European Central Bank (ECB) to maintain its neutral policy outlook for longer.

With the Eurozone economy continuing to demonstrate signs of slowness investors were encouraged to sell out of the Euro, in spite of the softness of the US Dollar.

While the odds of a fresh populist upset in the French presidential election seem to have slimmed the general mood of markets remains somewhat jittery.

Although centrist Emmanuel Macron continues to lead in the polls investors are still wary of a swing in the final vote.

Confidence in the health of the Eurozone economy could pick up ahead of the weekend if the latest raft of Eurozone PMIs surprise to the upside.

Forecasts point towards a slight slowing in growth across the board, however, which could weigh on the EUR USD exchange rate.

Analysts at Lloyds Bank take a more optimistic view, though, noting that:

‘In the absence of a more aggressive pace of Fed tightening or a more precipitous rise in European political risk, we believe the outlook for EUR/USD is skewed to the upside.’

Demand for the US Dollar has been limited this week thanks to the less optimistic tone taken by Federal Reserve policymakers.

Recent comments have underlined the likelihood of the central bank maintaining a more gradual pace of interest rate hikes.

Coupled with concerns over the US administration’s ability to deliver on promised fiscal stimulus this has softened the ‘Greenback’.

Doubts over Trump’s ability to push through reforms could help to shore up the EUR USD exchange rate for some time, particularly as political worries mount.

Expectations are not positive for the latest US housing market data, with existing home sales forecast to have contracted -2.3% on the month in February.

Any signs of weakening consumer confidence could see the US Dollar extend its recent downtrend further.

Friday’s durable goods orders figure is also expected to show some slowing on the month, creating no urgency for the Fed to pursue a more hawkish course.

Comments from Fed Chair Janet Yellen could provoke some volatility for the EUR USD exchange rate, even though she is not expected to offer any particular guidance on monetary policy.

Current EUR USD Interbank Exchange Rates

At the time of writing, the Euro US Dollar exchange rate was trending lower at 1.08. Meanwhile, the US Dollar Euro exchange rate was making limited gains in the region of 0.92.