There is a lot of soul-searching underway in European capitals as leaders come to terms with last week's shock new direction for US foreign policy. Having been shut out of negotiations in Saudi Arabia this week, European leaders are meeting in Paris to define a position. One of the big questions will be what to do about defense spending, ING’s FX analysts Chris Turner notes.
EUR/USD set to be back at 1.03 in a month's time
"If so, that should mean higher long-term European interest rates, and perhaps there were some early signs of that on Friday when European bond yields did not follow US Treasury yields lower on the softer US retail sales data. While moves towards a ceasefire in Ukraine have been helping EUR/USD at the margin, the prospect of increased US isolationism certainly does not look a positive for the euro."
"And a much higher EUR/USD from here probably requires a conviction on some much softer US activity data – a conviction we do not have. We remain of the view that this EUR/USD correction will probably peter out somewhere in the 1.0535/75 area and stick with the view that EUR/USD will be back at 1.03 in a month's time."
"On the eurozone calendar this week are consumer confidence on Thursday and the flash February PMIs on Friday. The focus will also be on the run-up to the weekend elections in Germany, where a very tight result and a delay in forming a coalition would likely be seen as a euro negative given the lack of leadership in Europe currently."
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