EUR/USD: Outlook no longer dominated just by US dollar strength - Rabobank

Analysts at Rabobank, point out that while a better tone in risk appetite may dull the outlook for the US dollar, they warn the Euro may struggle to gain traction next year against a cloudier political backdrop particularly if economic momentum does not recover.

Key Quotes: 

“Strong US growth and expectations of higher Fed rates remain supportive factors for the USD. With respect to EUR/USD, in the summer a negative EUR bias began to take shape which has been extended into the autumn. Looking ahead to next year we are unconvinced that the EUR will be in good enough shape to take back significant ground from the greenback. We continue to forecast a low for EUR/USD at 1.12 ahead of the middle of next year and while we see scope for a move higher by the EUR during H2 2019, there are downside risks to this view.”

“The implication is that outlook for EUR/USD is no longer dominated just by dollar strength but also by an outlook for the EUR which is looking far less robust than in the halcyon days of H2 2017. That said, while the outlook for the EUR next year appears tarnished, so does that of the USD. Concerns that the hawkish policy of the Fed could invert the yield curve and set up conditions for the next US recession have been bouncing around the market for some time.”

“Even if policy-makers avoid recession, slower US growth and a plateauing in US rates appears likely in 2019. In addition, if growth slows there is likely to be greater focus on the US’s widening budget deficit. For these reasons we are forecasting a modest appreciation in EUR/USD in H2 2019. However, European politics and the potential for a more cautious ECB suggests there are risks to this view.”