EUR/USD: EUR weakness or USD strength? - Rabobank

According to Jane Foley, Head of FX Strategy, point out that politics is another factor that has soured the outlook for the Euro and that Brexit has the potential to act as a drag on the Euro and other European currencies against the US Dollar.

Key Quotes: 

“In April EUR/USD reached its lowest level since June 2017, breaching key supports in the 1.1184 and 1.1177 areas which, from a technical perspective, puts in view a potential move towards the 1.09/1.08 area. Since the market appears to be already holding short EUR positions, this target may prove to be ambitious. That said, we retain our target of EUR/USD 1.10 on a 6 month view.”

“While recent economic data suggest that the US economy continues to expand at a moderate pace, data from the German economy has repeatedly disappointed the market, resulting in more dovish guidance from the ECB. The April reading of German manufacturing PMI remains deep in contractionary territory while the latest numbers from the IFO survey were also softer than expected. Even though the German services sector remains better positioned and strong employment levels and looser fiscal policy settings are supporting domestic demand, the market is concerned about the hit to the country’s manufacturing and export sectors from slower Chinese growth. Going forward, fears are also building that the German export machine could be vulnerable to a step up in trade tensions between the US and the EU. Politics is another factor that has soured the outlook for the EUR.”

“Brexit has the potential to act as a drag on the EUR and other European currencies vs. the USD. May’s European parliamentary elections could also create jitters for the EUR given the rise of nationalism in the region. In recent domestic elections nationalist parties won more than 25% of the vote in Hungary, Austria and Switzerland and between 17% and 24% of the share in Italy, Sweden, Finland, Denmark and Estonia. Meanwhile France, Germany and Spain have seen support for far-right parties grow in recent years. Additionally Brexit supporters could be a disruptive force among UK MEPs. Polls suggest Euro-sceptics could win one third of seats in the European Parliament allowing for the formation of a minority that could block EU procedures and make the legislative process more cumbersome in areas such as foreign policy and freedom of movement.”