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Euro US Dollar Outlook: Will EUR Recover on German Political Unity?

US Dollar Currency Forecast

On Wednesday afternoon, the Euro has risen slightly higher against the US Dollar.

From a rate of 1.1743 seen on Tuesday afternoon, the EUR/USD exchange rate has since upgraded to the region of 1.1795.

This appreciation has been caused by recent comments from a European Central Bank (ECB) official, namely Benoit Coeure.

Striking a refreshingly hawkish tone, Coeure has told German newspaper Handelsblatt that he wants quantiative easing to start being reduced, musing that this could lead to interest rate hikes.

The ECB last cut interest rates to 0% in early 2016 and Euro traders have been waiting even longer for the eventual and highly-coveted interest rate hike.

(Last updated November 21st, 2017)

The Euro has seen a minor improvement against the US Dollar today, trading an an exchange rate of 1.1743.

This minimal advance could be caused by the ongoing German coalition process, where officials have been trying to form an effective government.

Although a resolution before Christmas remains a slim possibility, there are seemingly still lingering hopes that a breakthrough will be made in the near-term.

(First published November 21st, 2017)

The Euro has slipped against the US Dollar today, but could regain lost ground if the German political crisis is resolved (relatively) quickly.

USD traders will be more focused on upcoming Federal Reserve minutes, which may trigger a major US Dollar shift.

Resolution of Coalition Crisis may Trigger EUR USD Rally

The formation of the next German government could remain a highly influential factor for the Euro in the coming weeks and months.

For context, Angela Merkel’s CDU/CSU party is back at square one after failing to form a coalition with the FDP and Green parties.

With the best will in the world, the ultimate unification process may not be completed until 2018 at the earliest.

This is because even the original coalition talks were considered a complex undertaking, before this latest upset.

Emphasising the gravity of the situation, German President Frank-Walter Steinmeier said;

‘[This is] an unprecedented situation in the history of the Federal Republic of Germany’.

Steinmeier has three real options that he can pursue, the first being the formation of a minority government.

This has already been dismissed by Merkel, who has said;

‘I don’t have a minority government in my plans’.

Another option is convincing the FDP party (which withdrew from talks) to return to the negotiating table.

The third option is the nuclear one, where another German election will be called.

This would be a huge gamble for the CDU/CSU party, as the 2017 election saw the pairing suffer a loss of votes to smaller parties like the right-wing AfD.

Adding a closing warning to German politicians to reach a speedy resolution, President Steinmeier has added;

‘There would be great concern inside and outside [Germany] if the political forces didn’t fulfil their responsibility’.

If a viable solution is found in the near-term, that keeps Angela Merkel as Chancellor, then the Euro could undergo a period of appreciation.

US Dollar Forecast: Is Turbulence ahead on Fed Minutes?

The US Dollar could see significant movement more immediately, when Fed minutes for its early November meeting come out on Wednesday.

The Fed left interest rates unchanged during its last meeting, but traders have been paying closer attention to a possible rate hike in December.

A significant portion of economists think that this is more than possible, with over 90% predicting a rate hike from 1.25% to 1.50%.

Even with such high chances of a December rate hike, however, a third hike in 2017 is not entirely set in stone.

If the minutes give a strong indication that a December hike is likely, the US Dollar could rise sharply against the Euro.

Recent Interbank EUR USD Exchange Rates

At the time of writing, the Euro to US Dollar (EUR USD) exchange rate was trading at 1.1726 and the US Dollar to Euro (USD EUR) exchange rate was trading at 0.8525.