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Surprise for EUR USD Exchange Rate Ahead from Dutch Elections and Fed Meeting?

The Euro is advancing against the US Dollar even though the outcome of today’s Dutch elections could shake the outlook of the currency bloc.

The approach of a near-certain interest rate hike from the Federal Reserve is keeping the US Dollar submissive, as investors are selling a ‘Greenback’ that has already had higher interest rates firmly priced-in to the exchange rates.

This is allowing EUR USD exchange rates to rise, despite the potential for the populist and anti-Islam Party for Freedom (PVV) to secure strong support from the electorate in the Netherlands today.

The Dutch political system uses proportional representation and so a coalition government – likely between as many as four to six different parties – is as good as guaranteed.

This means it is highly unlikely PVV leader Geert Wilders will be able to get into power, unless he secures more than threefold the number of seats polls suggest he will claim during the vote to win with a majority of 76.

All other established parties have ruled out forming a coalition with Wilders, which has lessened the potential for a huge shake-up in the Netherlands’ political landscape.

However, markets are still cautious ahead of the results, as a strong showing of support for the far-right party may indicate that Marine Le Pen has a chance of winning the French Presidential elections starting next month.

Le Pen wants to withdraw France from the Eurozone, so any indication that the currency bloc is still in the grip of a wave of populism will unnerve investors and weaken the Euro.

As Wilders himself notes, ‘whatever the result is today the genie will not go back in the bottle. This patriotic revolution will continue.

EUR is finding support against the US Dollar regardless of these fears today, however, thanks to market confidence in imminent monetary tightening from the Federal Reserve.

Numerous speeches from members of the Federal Open Market Committee (FOMC), including Chair Janet Yellen, over the past few weeks rapidly increased market odds of an interest rate hike during today’s meeting.

Bets on the Fed funds futures market have floated around 90% for the past few days and, although movement against the Euro has been more turbulent, on the whole the US Dollar has been pushed to a nine-week high on the expectations of tightening.

This has allowed the EUR USD exchange rate to strengthen today as investors are already selling the US Dollar; taking profits on a hike that hasn’t even happened yet.

A further Fed rate hike at the FOMC meeting is practically pre-ordained,’ explains RBC Global Asset Management Chief Economist Eric Lascelles. ‘Markets have fully priced the outcome, Fed speakers have shouted it from the rooftops and the job figures confirm the continuation of American economic vibrancy.

Potential for more interest rate hikes across the year than markets are currently expecting is motivating some investors to hold onto the US Dollar, curbing losses against the Euro to -0.2%.

Futures currently show 53.2% odds of another hike in June and a 57.4% chance of further tightening in December, which would take rates up to the 1.25%-1.5% range – assuming the Fed doesn’t accelerate the pace of hikes.

Were the Federal Reserve to upgrade its outlook to suggest there will be a third hike between now and the year-end, the US Dollar could still be set for sharp appreciation and the EUR USD exchange rate could tumble.

The Euro may be able to resist these headwinds if Wilders and the PVV are thoroughly defeated when the Dutch election results are known tomorrow.

If the Fed doesn’t offer a more hawkish outlook, a defeat for Wilders may allow the Euro to rack up significant gains.