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US Dollar Euro Slips from Highs on Federal Reserve’s Near-Term Uncertainty

Federal Reserve

Despite political uncertainty in Germany, the US Dollar Euro exchange rate outlook has been little changed overall this week. ‘Greenback’ traders are becoming anxious about the near-term outlooks for US monetary policy and fiscal policy, holding the US currency from its highs.

USD EUR began the week trading at the level of 0.8481. The pair briefly touched on a one-week-high of 0.8534 on Tuesday. While the pair has slipped from that high, it continued to trend near the key level of 0.85.

US Dollar (USD) Outlook Clouds as Fed Chair Notes Inflation Uncertainty

Demand for the US Dollar has been limited in recent sessions, but the currency has still been able to sustain most of its gains against the Euro this week.

US data in recent sessions has been relatively low impact and has had little effect on the US economic outlook. They have helped to support the ‘Greenback’s gains against the Euro however.

Monday’s CB leading index report from October beat expectations of 0.6% and printed at 1.2%, while October’s existing home sales came in at 2% rather than the forecast 0.7% on Tuesday.

The Chicago Fed national activity index rose from 0.36 to 0.65, well above the predicted 0.20.

However, the US Dollar Euro exchange rate has been unable to hold its best levels due to rising fiscal policy and monetary policy uncertainty.

The US Republican Party’s plans to push through sweeping changes to the US tax system may be significantly delayed or scaled back to help the bill pass through Congress, which has weighed on the US Dollar.

On top of this, fresh comments from Federal Reserve Chairwoman Janet Yellen on Tuesday caused market uncertainty about what would become of the bank’s monetary policy outlook following a predicted interest rate hike in December.

Yellen offered perhaps the biggest indication yet that bank officials were not confident in the US inflation outlook.

While she continued to predict that underlying inflation trends would recover, she indicated the bank could not clearly understand the causes of recent inflation weakness in the US. She hinted that she was open to the possibility that US inflation could remain low in coming years.

This domestic uncertainty, as well as market demand for riskier currencies in recent sessions, have limited the US Dollar’s strength.

Still, the US Dollar could find support in the coming days, depending on the Federal Reserve’s latest meeting minutes and Markit’s November US PMI projections.

Looking ahead, developments in US tax reform, as well as any news on domestic inflation, are likely to be the biggest influences on the US Dollar outlook.

Euro (EUR) Edges Away from Lows amid Risk-Sentiment

Monday saw investors sell the Euro against the US Dollar as it emerged that German Chancellor Angela Merkel had failed to secure a coalition government, and that talks had collapsed.

However, the Euro selloff had already slowed by Tuesday and the shared currency began to recover from its lows, as investors doubted the eventual outcome would have a considerable effect on the Eurozone’s optimistic economic outlook.

As Germany is the Eurozone’s biggest economy, there was a brief concern that the collapse in coalition talks could lead Chancellor Merkel to lose power.

German President Frank-Walter Steinmeier urged Parties to continue negotiating rather than calling a new snap election though. This helped the Euro recover.

According to Manuel Oliveri, FX strategist from Credit Agricole in London;

‘Regardless of what the German political outcome will be, the implementation of the economic policies will continue and investors are using this opportunity in the Euro weakness to adjust some positions,’

On top of some relief, the Euro is also benefitting slightly from market risk-appetite. While not typically a risky currency, investors have been more willing to take risks in investments which has benefitted the Euro despite German political uncertainty.

So while the Euro outlook and the Eurozone economic outlook are still generally optimistic, developments in German politics have the biggest potential to influence the Euro in the coming weeks.

Investors are also likely to react to Markit’s Eurozone PMI projections on Thursday however. If they disappoint, the Euro could weaken.

USD EUR Interbank Rate

At the time of writing this article, the US Dollar Euro exchange rate trended in the region of 0.8511. The Euro to US Dollar exchange rate traded at around 1.1745.