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Long Term EUR USD Exchange Rate Forecast; Will Italian Referendum Threaten Eurozone?

Euro Currency Forecast

Political threats are likely to weigh on the long term EUR USD exchange rate forecast, while surging hopes of US monetary tightening support the US Dollar against the Euro.

The Fed Funds futures market priced in a staggering 100% likelihood that monetary policy would tighten; the first time ever that odds have shown markets are certain of change. US$2.1 trillion has been bet on rising borrowing costs.

While the odds did edge back down today, coming to rest at 93.5%, the latest durable goods orders data quickly pushed them back up again, with current market pricing 98.2% chance at a hike. Goods orders swelled by 4.8% against predictions of a 1.7% increase. It is unlikely that anything will deter the Fed from hiking now – from the market’s point of view, at least – meaning long term EUR USD exchange rate forecasts are likely to continue to hold an upside bias.

Renzi Italian Referendum Defeat Could Weigh on Long Term EUR USD Exchange Rate Forecasts

Euro Currency Forecast

Italian voters will go to the polls on the 4th of December to vote on Prime Minister Matteo Renzi’s proposed reforms to the Constitution. Renzi wants to change the way the Italian Senate works, curbing its powers and reducing the number of senators to a third, as well as changing who is appointed and how. This, he claims, would end the political upset that has seen the country endure 63 governments since the Second World War, while making it easier for legislation to be passed to combat the key threats facing the Italian economy.

Renzi has claimed he will resign if he loses – which polls currently suggest is a likelihood. If Renzi leaves, a general election is likely and Italy’s populist Five Star Movement could take power. Their chief aim is a referendum on whether or not Italy should abandon the Euro.

According to FT columnist Wolfgang Münchau;

The referendum matters as it could accelerate the path towards Euro exit. If Mr Renzi loses, he has said he would resign, leading to political chaos. Investors might conclude the game is up. On December 5, Europe could wake up to an immediate threat of disintegration.

Continued signs that Italy will reject Renzi’s proposals are likely to severely weaken the long term EUR USD exchange rate forecast.

Long Term EUR USD Exchange Rate Forecasts

While the economic factors might point to downside risks to long term EUR USD exchange rate forecasts, relative strength indicators for the Euro US Dollar pairing are currently slumped under 24. A score below 30 is considered oversold, meaning the EUR USD is far below its fair market value.

However, with the long-term moving average (MA) having crossed the short term MA earlier this month and the convergence difference remaining largely the same, investors are going to be inclined to position themselves short on the Euro, meaning they expect EUR USD to fall further.

At the time of writing, the Euro US Dollar exchange Rate (EUR USD) was trading around 1.05, while the US Dollar Euro exchange rate (USD EUR) was trading in the region of 0.94.