Euro to Dollar Rate Week Ahead Forecast: Snapping the Selloff
- Written by: Gary Howes
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The euro to dollar exchange rate (EUR/USD) could be set for a more constructive week.
Legal action against the U.S. Federal Reserve by the Trump White House looks to have arrested a selloff in EUR/USD.
The pair had fallen to a low of 1.1618 after 11 uninterrupted days of decline, but Monday sees a solid 0.50% gain to 1.1692, courtesy of Trump's latest moves.
Having failed to buckle under the weight of Trump's demands to lower interest rates more aggressively, the Fed now faces legal action from the U.S. Justice Department over the refurbishment costs of the Fed's Washington HQs.
The Justice Department has also threatened Fed Chairman Jerome Powell with criminal charges over the matter.
The legal papers were served Friday but it was only over the weekend that we learned of the developments.
The USD selloff indicates markets are nervous as to the future of Federal Reserve independence. Efforts by the White House to capture the Fed will have long-term implications for U.S. monetary policy as well as U.S. financial market stability and economic growth.
To be sure, near-term implications for Fed policy, and therefore the dollar, are unclear, as it's hard to see how the Fed's upcoming policy decisions will be impacted by this.
If so, the dollar could find its feet again and push the euro-dollar lower again.
However, we think the episode serves as a reminder that markets won't like the notion that U.S. institutions are being compromised by political agendas, and this could ensure a risk premium weighs on the dollar.
Given the disruption to the dollar's recent trend of appreciation, we forecast the euro-to-dollar to rebound to 1.1750 this week.
Looking ahead, keep an eye on Tuesday's release of U.S. inflation numbers for volatility. Here an above-consensus reading could remind markets that the Fed simply cannot lower interest rates while inflation is proving so resistant to decline.
However, an on-target or below-target reading would reinforce our constructive forecast for the coming week.
