EUR/USD: Stand off? - Rabobank

Jane Foley, Senior FX Strategist at Rabobank, explains that the EUR has held up well in the face of the USD revival and although strong growth and less accommodative monetary policy settings are factors set to support the greenback in 2018, the same influences are also set to provide sustenance to the EUR.
Key Quotes
“Our forecast that the pace of Fed tightening will be moderate is strengthened by the softer than expected reading for US November CPI at 0.1% m/m. The downward move in t-note yields in response to this data release earlier in the week sapped the strength of the USD, giving the EUR an opening to push higher.”
“If the main effect of the December FOMC press conference was to reign in expectations about the pace of policy tightening, the impact of the ECB policy meeting was similar. ECB President Draghi promoted a cautious outlook on inflation at his press conference yesterday and signalled that the Eurozone economy is not yet strong enough to warrant a reduction of policy stimulus. That said, there was no strong expectations in the market that the ECB would be hiking rates in 2018.”
“The big questions in the market surrounding the ECB relate to whether QE will be drawn to a close after 2018’s nine month tapered extension and in which quarter the following year is the central bank likely to hike. Although the dovish tone of ECB President Draghi on inflation weighed on the EUR yesterday, given the substantial upward revision to growth estimates and the increased growth risks that are now seen by the ECB, the EUR has likely been provided with adequate sustenance to hold off another bout of USD strength.”
“Despite the USD’s comeback since September, the EUR remains the best performing G10 currency of the year. The appearance of rapid economic growth in the region, soft inflation and low interest rates has been appealing for investors. Also, since the victory of Macron in the French Presidential elections in the spring, the political backdrop has been less divisive in the Eurozone this year than many had predicted. Neither the political issues in Catalonia nor Germany this autumn have had a lasting market impact due to the lack of contagion risk stemming from either situation.”
“Going forward, the Italian elections in March could be a source of disruption giving the risk of a hung parliament. However, governed by the expectations of strong regional growth, we expect the EUR to remain well bid into 2018. That said, the market is already long of the single currency. As a consequence, we expect upside potential to be tough above the EUR/USD 1.20 level.”
Author

Sandeep Kanihama
FXStreet Contributor
Sandeep Kanihama is an FX Editor and Analyst with FXstreet having principally focus area on Asia and European markets with commodity, currency and equities coverage. He is stationed in the Indian capital city of Delhi.

















