EUR to USD Exchange Rate Continues to Advance amid US Political Uncertainty

August 22, 2018 – Written by James Fuller

Despite a lack of fresh Eurozone data on Wednesday, the Euro to US Dollar (EUR/USD) exchange rate has continued to climb. The US Dollar continues to be sold off this week, as the latest US political uncertainties appeared to put an end to weeks of US Dollar hawkishness.

Following last week’s brief dip to a yearly low of 1.1304, EUR/USD has been mounting a solid recovery. EUR/USD ended last week at the level of 1.1446 and since then has continued to climb. At the time of writing on Wednesday, EUR/USD trended near a weekly high of 1.1612.

EUR Benefits from Weaker US Dollar Despite Lack of Eurozone Support

Thanks to US Dollar (USD) weakness alone, the Euro has become of this week’s best performing major currencies.

This is despite the lack of supportive news from the Eurozone itself this week, as well as the lasting concerns that broad weakness in the Turkish Lira (TRY) could have a negative impact on Eurozone banks.

On top of this, concerns persist about the possibility that global trade jitters and the possibility of a global trade war would hold back the Eurozone’s growth.

According to a Reuters poll, the Eurozone’s growth is unlikely to accelerate and will be held back to US-sparked global trade tensions.

While concerns about trade tensions between the US and Eurozone have lightened, analysts believe there is still a possibility of them worsening again. According to Bert Colijn from ING Bank:

‘For the moment it seems that the Trump-Juncker meeting has cleared the air somewhat between the US and Europe. We can’t discount the trade war flaring up again in the second half of the year … it could be that it will have more of an impact,

The question is how much that is going to be, which is very difficult to say, but we’ve already downgraded our forecasts somewhat over the past months.’

These factors limited the Euro’s strength, but EUR/USD has still seen one of its strongest rallies in months this week.

USD Tumbles as Concerns on Federal Reserve Independence and US Politics Weigh

The US Dollar’s recent bullish run has seemingly ended this week, as investors have become uncertain about the Federal Reserve’s independence and the stability of US politics due to this week’s developments.

Near the beginning of the week, US President Donald Trump indicated he was disappointed with the Federal Reserve’s decisions to keep hiking US interest rates, despite Trump picking Fed Chairman Jerome Powell.

This news made investors anxious that the US President could undermine the bank’s independence in some way, which led to US Dollar weakness.

On top of this, US political uncertainties worsened on Tuesday night as ex-allies of the US President were found guilty of unlawful activity amid US Special Counsel Robert Mueller’s ongoing Trump-Russia investigation.

Hopes that trade tensions between the US and China could soften during fresh US-China trade talks have also dampened market demand for the ‘safe haven’ US Dollar.

However, analysts predict the market reaction to the possibility of upcoming trade talks could have been overblown. According to Junichi Ishikawa, FX Strategist at IG Securities in Tokyo:

‘Market expectations may have exceeded the likely outcome from the trade talks, especially equities, which have gained significantly,

The talks could end with little fanfare as they will not be conducted at a high level.’

EUR/USD Forecast: Political Developments, Fed News, and Eurozone Growth Data

Can the Euro continue its recovery rally against the US Dollar? If Federal Reserve and US political uncertainties continue to worsen it’s certainly possible.

Wednesday evening will see the publication of the Federal Reserve’s latest meeting minutes report, and investors will be paying close attention to the bank’s monetary policy outlook.

Any accompanying comments about the bank’s independence or concerns on US protectionism could be particularly influential.

Multiple key ecostats will be published on Thursday, including the Eurozone’s August PMI projections from Markit.

These will give investors a better idea of how the Eurozone economy is performing this month, and is the data most likely to drive the Euro before markets close this week.

However, political developments and potential comments from Federal Reserve officials are more likely to drive the Euro to US Dollar exchange rate in the coming days.

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TAGS: Euro Forecasts