US Dollar Reverses Gains Achieved Against Euro After Italy’s Referendum

The dollar experienced strong volatility on Monday as a major political event in Europe raised the anxiety of currency traders and forced the euro to be subjected to rapid movements against the US currency.

A constitutional referendum, which took place in Italy on Sunday, revealed that the nation refused constitutional reforms that were suggested by Italian Prime Minister Matteo Renzi. The crushing defeat in the referendum prompted Renzi to announce that he will be resigning from his position, which will certainly add to political uncertainty in Europe.

The euro initially plunged to its lowest level in 20 months following the result of the referendum. However, the shared currency was quick to erase all of its losses as traders’ demand for it rose due to the cheaper exchange rate. The swift recovery could mean that the euro might head back down as the effect of the referendum’s result becomes clearer.

The shared currency’s exchange rate will be closely linked to a chain of political events in Europe in 2017. Elections in Netherlands, Germany, and France might open up the chance for the populist sentiment that is taking a hold of Europe to have a stronger foothold in the political scene.

Meanwhile in the USA, the dollar is due to get a boost from an interest rate hike from the Federal Reserve that appears to be all but certain. Investors believe there is a 97.2% chance of raising rates in the Federal Open Market Committee’s meeting on December 14, according to the CME Group FedWatch tool.

A higher fiscal spending, which US President-elect Donald Trump promised to bring once he is in office in January, will likely raise inflation rate, prompting the Federal Reserve to accelerate its pace of interest rate hikes. Futures prices show a 44.0% probability of a second hike in June. The US currency strengthens against other major peers as interest rates in the USA increase.

EUR/USD rose to 1.0721 as of 16:48 GMT, after touching 1.0513 at 23:00 GMT on Sunday, the pair’s lowest level since March 2015. Trading opened this week at 1.0590.

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