While the Euro to US Dollar exchange rate has slipped in recent weeks, it appears to face significant psychological support whenever it nears the key level of 1.05.
This week has seen EUR USD rebound from 1.05 to 1.06 after an earlier fall, despite an increase in US Dollar demand.
However, if the US economic outlook remains strong and the Federal Reserve hikes rates multiple times this year as hoped, the US Dollar could finally break through those key resistance levels.
This would see EUR USD falling ever-closer towards the fabled level of 1.00 – parity. Many analysts have entertained the notion of EUR USD parity in recent months due to concerns over the future of the Eurozone and Trump bullishness in markets.
Among the top Eurozone jitters dominating markets this year are the upcoming Eurozone elections. France, The Netherlands and Germany are holding elections throughout 2017.
If protectionist politicians were to take power in any of these key Eurozone states, traders fear that those nations could withdraw from the Eurozone. This would undermine the shared currency.
If France, for example, were to begin to leave the Eurozone, the Euro to US Dollar exchange rate would certainly plummet.
The Euro could surge, however, were a politician more-aligned with the status quo to win, as Eurozone growth has been solid in recent months.
Uncertainty in the US is also high, as the controversial President Trump nears the end of his first month in office.
Many analysts still don’t know what to make of Trump’s foreign and trade policies. The US stock market has enjoyed rallies since Trump was elected amid hopes that he would impress investors with stimulating fiscal policy.
Despite Trump causing the stock rally in the first place, he is also perceived as the biggest thread to the rally. Kathleen Brooks from City Index commented on the Trump stock rally;
‘We doubt that it is over, and would imagine that relationship has a long way to run. But it’s a keen reminder that President Trump, rather than valuation measures, are a bigger threat to the stock market rally.’
Trump’s far-reaching words have been known to destabilise markets and cause jitters in the past. If he were to hinder US growth with strict trade policy then Federal Reserve hike bets could fall, leaving the US Dollar weaker later in the year.
Fed rate hike bets have surged in the last week, as Fed Chairwoman Janet Yellen took a hawkish stance towards monetary policy in speeches. Yellen stated it would be ‘unwise’ to leave rates frozen too long and to make use of the current momentum in US economic growth.
This week’s impressive US inflation and retail sales datasets have also bolstered Fed rate hike bets and the US Dollar.
US consumer prices unexpectedly jumped to 2.5% year-on-year, while retail sales soared to 5.6% year-on-year.
With the US economy surpassing expectations and the Eurozone economy also seeing gradual improvement, the uncertainty on the political landscape will be the deciding factor on whether EUR USD could hit parity in 2017.
At the time of writing, the Euro to US Dollar exchange rate trended in the region of 1.06. The US Dollar to Euro exchange rate traded at 0.94.