- USD EUR Drops as Italian Economy finds Support – ECB commits to supporting the Italian bond market ahead of referendum.
- Euro Strengthened by Strong Data – German unemployment remains at lowest levels since 1981.
- US Dollar Struggles to Advance Despite Impressive Ecostats – Data is almost irrelevant in face of certainty of a Fed rate hike.
- US Employment Data Ahead – A positive report could propel USD upward.
The USD EUR exchange rate has fallen by just over half a cent from yesterday’s best levels as investors reacted positively to reports that the European Central Bank’s (ECB) is prepared to help the Italian economy after the referendum.
US Dollar Euro (USD EUR) Pressured by ECB Commitment
The US Dollar Euro (USD EUR) exchange rate slid yesterday as Reuters reported that the ECB would be willing to increase its purchases of Italian government bonds if Sunday’s constitutional referendum drives up borrowing costs.
With opinion polls suggesting that the majority of voters will reject the referendum, there is chance that the Italian banking sector could face further problems as Prime Minster Matteo Renzi has vowed to resign if the referendum is rejected.
The ECB is apparently ready to help offset any sudden spikes in bond yields after the vote as central bank sources claim that the ECB’s bond-buying scheme was flexible enough to deal with temporary market volatility.
However this has not helped to alleviate growing fears that Renzi’s resignation could lead the way for one of Italy’s populist parties to form a new government, potentially destabilising the European Union.
Euro (EUR) Bolstered by German Unemployment Data
Euro (EUR) exchange rate gains have also been helped by strong German employment figures that showed that unemployment held at 6% in November – its lowest levels since February 1981.
This further strengthened the outlook for the German economy after Tuesday’s CPI data reported that national inflation also remain unchanged at 0.8%, a two year high.
The positive figures helped allay concerns that Europe’s largest economy was beginning to slow following some disappointing data last week.
Fed Hike Bets Likely to Prevent Further Decline in US Dollar (USD)
The US Dollar (USD) is likely to repel any attempts by the Euro (EUR) to advance further as the near certainty that the Federal Reserve will raise interest rates next month is preventing any major sell off of the ‘Greenback’.
Analysts have put the odds of a December rate hike at over 90%, with many Fed members indicating that they will be seeking a rate hike in their next meeting as Federal Reserve Governor Jerome Powell explained;
‘The case for an increase in the federal funds rate has clearly strengthened since our previous meeting earlier this month. The committee has been patient about raising rates, that patience has paid dividends. But moving too slowly could eventually mean that the committee would have to tighten policy abruptly to avoid overshooting our goals.’
USD EUR Exchange Rate Forecast: US Employment Data May Bolster US Dollar
The USD EUR exchange rate may rally later this afternoon with the release of the US ADP Employment Change report, with investors predicting that US businesses will hire an additional 160k employees in October, rising from 147k the previous month.
The US Dollar is also likely to advance if US Personal Consumption Expenditure is able to rise past 1.7% in October.
Meanwhile tomorrow’s Italian GDP report could provide some momentum for the Euro if it is able to beat expectations that it will remain at 0.9% in the third quarter.
Current Interbank Exchange Rates
At the time of writing the USD EUR exchange rate was trending around 0.94 and the EUR USD exchange rate was trending around 1.06.
