Despite Eurozone political uncertainties and a lack of particularly impressive Eurozone ecostats in recent sessions, the Euro to US Dollar (EUR/USD) exchange rate easily surged on Tuesday thanks to political news made investors less eager to hold on to ‘safe haven’ currencies like the US Dollar.
If market demand for ‘safe haven’ currencies remains low, EUR/USD could see stronger gains this week. Last week the pair only edged slightly higher from 1.2293 to 1.2316, but since Monday has already climbed to a fortnight high of 1.2410.
Investors have had little domestic reason to buy the Euro this week, meaning EUR/USD gains have more to do with US Dollar weakness and risk-sentiment than any particular Euro strength.
Over the weekend, Italy held its 2018 general election and the results left the nation’s political outlook uncertain. Populist parties saw a surge in support and no party gained enough votes to secure a majority.
This has left Italy in a hung parliament and has limited the Euro’s strength against rivals this week. If not for Italian political uncertainty, EUR/USD could be even higher.
Euro investors have been reassured by other Eurozone political developments. German Chancellor Angela Merkel finally secured a fourth term in power over the weekend as the SPD Party agreed to form another ‘grand coalition’ with Merkel’s CDU Party.
This week’s Eurozone data has had little impact on the Euro outlook so far, with investors awaiting more influential data and European Central Bank (ECB) news later in the week.
Low market appeal in ‘safe haven’ currencies like the US Dollar since Monday evening has been the latest cause of EUR/USD gains.
On Monday evening, top officials from the US Republican Party indicated that they could oppose or even block the US Presidential administration’s attempts to introduce stricter trade tariffs or start a ‘trade war’.
This lightened trade war fears and made investors more eager to take risks. As a result, safe investments popular during times of uncertainty, like the US Dollar, weakened.
The market’s risk-rally only accelerated on Tuesday, when reports emerged that the isolated nation of North Korea had agreed to hold a summit of talks with South Korea in April 2018.
South Korea even claimed that the North was willing to discuss the possibility of denuclearisation if the nation’s regime could be assured security in return.
As threats of military action between North Korea and the US caused market panic at various points in 2017, hopes of diplomacy between North Korea and other nations relaxed markets further and weakened the ‘safe haven’ US Dollar.
As political news has been the main driver of Euro to US Dollar exchange rate movement so far this week, the pair is likely to continue reacting to political developments in Italy or the US and North Korea.
However, economic data due for publication in the second half of the week could also influence EUR/USD trade.
Wednesday will see the publication of Eurozone Gross Domestic Product (GDP) projections for Q4 2017, followed by US ADP employment stats from February.
Friday’s US Non-Farm Payroll results from February are even more likely to be influential for US Dollar trade, but perhaps the most notable event on this week’s data calendar will be Thursday’s European Central Bank (ECB) policy decision.
The ECB is not expected to make any changes to monetary policy in its March decision, but any hints of hawkishness from the bank would make the Euro more appealing.
On the other hand, if the bank takes a cautious or dovish stance due to US trade protectionism or Italian political uncertainty, the Euro to US Dollar exchange rate could shed some of this week’s gains.