Euro US Dollar Exchange Rate Slips as Fed Decision Looms
The Euro US Dollar (EUR/USD) exchange rate is edging lower during today’s session as the Federal Reserve’s latest policy statement is in the spotlight.
At the time of writing, the EUR/USD exchange rate is trading at around $1.1281, approximately down by 0.2% from today’s opening levels.
US Dollar (USD) Lifts as Markets Await Fed’s Decision
Meanwhile, the US Dollar (USD) is buoyed against the Euro (EUR) as the Federal Reserve is set to publish its latest interest rate decision later this evening.
The Fed is widely expected to leave interest rates unchanged at 0.25%.
Recently, inflation in the US has soared to 7%, while unemployment continues to fall, both of which support potential tightening.
USD investors have priced in four rate hikes throughout this year which may unsettle a market that has become accustomed to loose monetary policy.
According to Jim Reid, strategist at Deutsche Bank, Jerome Powell, the Fed Chair, is in for ‘an interesting day of communications’, as he outlines his proposed method of quantitative tightening.
Reid continued that, although it is too early for specific quantitative tightening policies to be revealed, many experts are expecting Powell to begin the ‘give-and-take’ process of guiding the market.
Pictet Wealth Management’s Thomas Costerg, wrote:
‘The Fed will be judged not by its ability to move rates up but by its capacity to avoid having to cut nominal rates all the way back to zero again and restart QE when the first external shock hits.
‘This is far from being assured.’
Euro (EUR) Falls amid Italian Political Uncertainty
The Euro US Dollar (EUR/USD) exchange rate is losing ground in response to the political uncertainty in Italy.
Italy is headed towards potential upheaval as MPs vote for a a new President..
Prime Minister Mario Draghi is considered a favourite to become President, though if that happens then a new Prime Minister will need to be appointed.
Anna Rosenberg, head of Europe and the U.K. at Signum Global Advisors, said that Draghi has been ‘the only one that has so far been able to hold together a very complex coalition’, however it’s not guaranteed that he will acquire the position.
Gianfranco Pasquino, an Italian political scientist and professor at the University of Bologna, said:
‘No previous prime minister has ever become president of the Republic and if Mario Draghi becomes president there will be the problem of creating a new government and this will be a very complex problem.’
The Euro is being further weighed on by the US Dollar’s strength due to the negative correlation between the pairing.
EUR/USD Forecast: Fed’s Decisions to Remain in Spotlight
Looking ahead, the Euro US Dollar (EUR/USD) exchange rate is likely to be influenced by the Federal Reserve’s decisions later today.
Although rates are expected to remain unchanged, a surprise hike will spook the market.
Additionally, the ‘Greenback’ may be bolstered by the publication of the fourth quarter’s GDP release which is forecast report growth accelerated from 2.3% to 5.5%.
US employment figures may also support USD exchange rates as initial jobless claims are expected to drop from 286K to 260K, suggesting that more citizens are in employment which will aid the US economy.
Meanwhile, the Euro may feel the pressure at the end of the week’s session as Europe’s largest economy, Germany, is scheduled to reveal its fourth quarter GDP. Presently, it is forecast to show an economic contraction, from 1.7% to -0.3%.
Italy’s political landscape, the Fed’s decisions and the ongoing Brexit negotiations may also limit the Euro’s upside potential.