Euro US Dollar (EUR/USD) Exchange Rate Struggles Despite German Coalition Progress
Even though coalition talks between Angela Merkel’s CDU/CSU and the SPD saw a breakthrough this failed to boost the Euro to US Dollar (EUR/USD) exchange rate for long.
While this represents a significant step towards forming a new German government, more than four months after the election, the Euro (EUR) struggled to capitalise on the news.
There is still the potential for the deal to fall through, with SPD members required to vote on the proposed alliance within the next few weeks.
This creates the possibility of further political disruption down the road, keeping something of a lid on EUR exchange rates.
However, as Carsten Brzeski, Chief Economist at ING, noted:
‘The SPD party leaders negotiated two interesting trophies this morning. The SPD would get the finance ministry and the ministry of foreign affairs in a new government. This should give the SPD ministers more weight in a next grand coalition than in the current coalition. Whether these two trophies are enough to tip the balance in favour of party support for the coalition agreement remains to be seen. In our view, the outcome is too close to call and there still is the risk that another grand coalition could be stopped at the finish line.’
High Odds of Fed Rate Hike Support US Dollar (USD) Exchange Rates
Although Federal Reserve policymakers have taken a slightly less hawkish tone on monetary policy the impact on the EUR/USD exchange rate has been limited.
Even with the odds of a March interest rate hike dipping slightly, falling back under 90%, support for the US Dollar (USD) remains strong.
Last week’s better-than-forecast uptick in wage growth continues to limit the downside potential of USD exchange rates, in spite of the disappointing nature of more recent domestic data.
Some of the shine could be taken off the US Dollar, though, if December’s consumer credit figure shows a significant dip on the month.
As the outlook of the US economy remains somewhat shaky at present, given the level of uncertainty that still surrounds the impact of the Trump administration’s tax cuts, the EUR/USD exchange rate may find a rallying point.
ECB Commentary Forecast to Weigh on EUR/USD Exchange Rate
Further weakness could be in store for the EUR/USD exchange rate on the back of the European Central Bank (ECB) Economic Bulletin, with investors looking for clues as to the central bank’s outlook.
If the message of the Bulletin proves more dovish in nature this could see the Euro slump sharply across the board, diminishing the prospect of any imminent winding down of the ECB’s long-running quantitative easing program.
Commentary from ECB policymakers will also be in focus in the near term, leaving the Euro vulnerable to additional downside pressure.
Even so, if December’s German trade data betters forecast this could help to shore up the EUR/USD exchange rate, encouraging greater confidence in the health of the Eurozone’s powerhouse economy.
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