EUR: More to give? - Rabobank

The good news for the Eurozone has been coming thick and fast with yesterday morning’s release of German Q3 GDP registered a better than expected 0.8% q/q upswing on the back of strong exports and capital investment, explains Jane Foley, Senior FX Strategist at Rabobank. 

Key Quotes

“This news followed recent announcement from the IMF of an upward revision to its 2017 growth forecast.  The Eurozone is now expected to expand at a pace of 2.1% in 2017.  The IMF remarked that the “European recovery is spilling over to the rest of the world, contributing significantly to global growth”. The news has supported the EUR, making it the best performing G10 currency on a 1 day view.  That said, we would argue that much of the direction of EUR/USD between now and the end of the year will be determined by the greenback.”  

“The better tone in EUR/USD has allowed the currency pair to push back above the 200 sma on the weekly chart, bolstering the outlook for the currency pair. Strong economic data from the Eurozone has clearly played its part in support the EUR in recent sessions, but we would argue that the bigger influence in recent sessions has been disappointment over the outlook for US tax reform.  Despite the recent uptick, EUR/USD remains in the downtrend that can be drawn back to September when a renewal of optimism about US fiscal stimulus provided a major boost to the USD.”

“Last week, these hopes suffered a set-back as Senate Republicans announced their tax bill which proposed that the cut to US corporation tax could be delayed to 2019.  In addition it would forgo the repeal of the estate tax and eliminate the state and local tax deduction.   Both the House and the Senate will need to pass their respective bills before they meet to reconcile their differences.  Although the vote in Congress is expected before Thanksgiving, the Senate is set to take longer.  Any significant delay will not be welcomed by investors.  Assuming tax reform is passed into law it will be the first legislative victory since the start of the Trump Presidency.  Failure to pass it into law before next year’s mid-term elections could have a significant impact on the outcome and on market sentiment.”

“We would expect the progress of tax reform to be the biggest driver of USD sentiment over the next few months. Clearly the forthcoming Fed meeting will be a key market factor.  However, a 25 bps rate hike is mostly in the price.  What is likely to be more important than the rate hike this month is the direction offered by the Fed.  That said, this policy guidance is arguably of less worth than usual given the changes that are afoot within the Fed’s Board of Governors.  Although Powell’s appointment as Fed Chair from February is in itself unlikely to alter the bias of the Fed the relatively high number of vacancies on the board suggests that Trump has the potential to have significant influence in appointing the Fed’s permanent voting members next year.”

“Expectations of another Fed rate hike has been a USD supportive factor in recent weeks.  This factor combined with the prospect of US fiscal stimulus and strong economic growth has allowed the USD to be one of the best performing world currencies since September.  The EUR, however, has held its own better than most in this time frame.  On the back of strong growth and low interest rates the Eurozone remains attractive to investment.  Even though the political calm that followed Macron’s victory in the spring French elections has been broken, the lack of contagion stemming from the Catalonian crisis suggests that the Eurozone political situation is still stable.  Although we expect EUR/USD to consolidate close to current levels on a 3 mth view, we still see scope for the EUR/USD to push towards 1.20 on a 6 mth view.  That said, a hastened pace of tax reform in the US would provide downside risks to this view.”