EUR USD Exchange Rate Weakens on US Fed Rate Hike Anticipation

December 7, 2017 - Written by Ben Hughes

STORY LINK EUR USD Exchange Rate Weakens on US Fed Rate Hike Anticipation

The Euro US Dollar (EUR USD) exchange rate remained bearish on Thursday with markets anticipating a rate hike from the US Federal Reserve in December whilst also reacting to some mixed ecostats from the bloc.

Eurozone Data Proves Mixed, EUR USD Exchange Rate Remains Weak

Growth in the Eurozone printed at 0.6% quarter-on-quarter in the three months to September according to official data, with private consumption investment largely fuelling the increase.

On a yearly basis, the Eurozone’s GDP advanced by 2.6%, upwardly revised from the flash estimate of 2.5%.

Breaking the figures down; exports accelerated at a faster pace of 1.2%, up from the second quarter’s rise of 1%, whilst imports slowed to 1.1%, down from 1.7%.

Economists looking at these figures now expect that 2017 will be the best year in a decade for the Eurozone, with data this week further confirming this outlook.

In other, slightly worse news, industrial production in Germany fell by -1.4% month-on-month in October, well below the market expectation of 2.2% growth and the previous period’s -0.5% fall.

This marked the biggest decline in industrial output since December last year, with production falling across all industrial sectors apart from energy.

Production notably decelerated for capital goods, consumer goods and intermediate goods.

The EUR USD exchange rate remained bearish despite these figures, however, with markets still more concerned with the possibility of a rate hike from the US Fed in December.

US Dollar (USD) Exchange Rates Bolstered by US Fed Rate Hike Prospects

Demand for the US Dollar remained high today with markets still anticipating a rate hike from the US Fed this month and hype building for Republican tax reform.

A Reuters poll of Economists revealed that the Federal Reserve is still expected to raise interest rates for a third and final time this year, with all 103 people asked agreeing that rates will once again be raised by 25 basis points.

Senior Economist at Deutsche Bank, Brett Ryan dismissed worries that the US economy might not be capable of handling the hike, claiming:

‘The Fed is still accommodative at the moment and we are still some ways away from the neutral Fed funds rate which would in the Fed’s view be closer to the 2.75%. The Fed can hike without slowing the economy’.

Nonetheless, some parties remain apprehensive about low levels of inflation in the US and what it might mean for monetary policy in the year ahead.

EUR USD Outlook Remains Gloomy as Trump Tax Makes Strides

The outlook for the Euro US Dollar exchange rate is predominantly gloomy, with markets placing the US Fed as the more likely candidate for a rate hike in December (and further hikes in early 2018) than the European Central Bank (ECB).

Beyond this, Republican tax reform in the US has been making great strides, though it now faces one of the final hurdles in the form of reconciling the House version of the Bill and the Senate version.

This could prove problematic, especially in respect to aspects like the Senate’s proposed corporate tax cut delay, which would see the 20% reduction moved to the back end of 2018.

Markets will also be keeping a keen eye on tomorrow’s German trade balance figures, with a reduction in surplus expected from 24.1b to 21.9b.

Notable data prints for the US tomorrow include the change in non-farm payrolls, employment rate, hourly earnings, and the University of Michigan Sentiment assessment.

Unless these figures prove quite disappointing, however, it is unlikely that the EUR will regain the lead, especially as December progresses.

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TAGS: Euro Forecasts