The Euro US Dollar exchange rate looks to sustain gains this week despite a lack of change in the Eurozone outlook, as a US Dollar selloff and concerns about the US political outlook have made for some easy EUR USD gains.
EUR USD opened at the level of 1.1665 on Monday and reached a one-month-high of 1.1856 on Wednesday. Since then the pair has continued to trend closely to the level of 1.18.
Eurozone Growth Outlook Supports Euro (EUR) Trade
Despite a lack of strong Eurozone inflation stats this week, demand for the Euro has been solid. This has been largely due to impressive Eurozone growth stats reminding markets that the growth outlook for the bloc is optimistic.
Thanks partially to stronger-than-forecast German and Italian Q3 Gross Domestic Product (GDP) projections on Tuesday, economists expect the Eurozone’s 2017 growth will be its best in around a decade.
Economists have positive outlooks for the bloc for the remainder of this year and 2018. According to Louis Harreau, economist from CA-CIB;
‘All stars remain aligned for the Eurozone: lower fiscal drag, accommodative monetary policy, decent level for the Euro, strong economic confidence,
The only increasing risk for 2018 is the Italian election, but that should have a limited impact on economic confidence.’
Harreau also believed that inflation would pick up, despite the European Central Bank’s (ECB) recent forecasts of weak 2018 inflation in the bloc.
Not only is the outlook for the Eurozone bloc as a whole optimistic, but the Euro currency is being seen as a reliable buy to more investors, according to a report from Bloomberg. This is due to the bloc’s continuously improving macroeconomic backdrop.
Speaking to Bloomberg TV, Shahab Jalinoos, foreign-exchange strategy head at Credit Suisse Group AG, stated;
‘The Euro will continue to go higher because of the 3 percent of GDP current account surplus backing it up, Effectively, when you combine that with the very strong growth number that we’ve seen in countries across the Eurozone, the natural path is to go up.’
Essentially, the strong Eurozone growth outlook is keeping the shared currency buoyed despite the mixed inflation outlook and this trend is likely to continue for the medium-term.
Next week’s Eurozone PMIs from Markit are expected to indicate that strong growth continued in the bloc in November.
Unless the US Dollar strengthens considerable or Eurozone PMIs come in well below expectations, the Euro is likely to remain strong against the ‘Greenback’ in the coming weeks.
US Dollar (USD) Sold on Fresh Political Uncertainties
The US Dollar has seen poor performance in recent sessions, despite markets being extremely confident that the Federal Reserve will hike US interest rates again in December.
This is because political uncertainties in the nation have hit headlines again and investors are anxious about how political waves could have a negative impact on the US economic outlook.
Investors spent most of the week anxious about US Republican tax reform attempts and whether or not they would get through Congress.
While one bill successfully beat a major obstacle on Thursday evening by passing through the House of Congress, other news from the evening surprised investors and caused a US Dollar selloff.
Reports emerged that US Special Counsel Robert Mueller served US President Donald Trump’s election campaign a subpoena in the middle of October. The investigation allegedly demanded documents containing Russian keywords from more than a dozen officials.
The order suggests an elevation in the ongoing investigation of Russia’s involvement with the US 2016 Presidential Election, and caused investors to sell the US Dollar in a panic.
According to Viraj Patel from ING;
‘Global markets haven’t batted an eyelid to the House Republicans passing their version of the Tax Cuts and Jobs Act through, not least because the spotlight has been stolen by (the Mueller) reports,
It’s difficult to see anything but the Dollar losing out in an environment where policy and political uncertainty remain elevated,’
As Mueller’s Trump-Russia investigation is ongoing, this represents a significant downside risk for the US Dollar in the long-term.
Next week’s US data is unlikely to influence the US Dollar outlook much, with trade likely to remain focused on US tax reform and political controversy.
The Federal Open Market Committee’s (FOMC) latest meeting minutes will be published next Wednesday and if the bank brings up political risks this could cause some USD weakness.
EUR USD Interbank Rate
At the time of writing this article, the Euro US Dollar exchange rate trended in the region of 1.1805. The US Dollar to Euro exchange rate traded at around 0.8470.