According to Jane Foley, senior FX strategist at Rabobank, any signs of a shift towards a more cautious policy approach in the upcoming ECB meet, will likely weigh on the EUR.
Key Quotes
“In the final weeks of the year, there were plenty of reasons for USD bulls to re-consider their positions. The market’s assessment regarding the outlook for both the US economy and the trajectory of Fed interest rates were then undergoing a significant adjustment. Measured from its high in mid-December, and its mid-January low the DXY dollar index dropped about 2.8%. Since then the dollar has reclaimed some ground and we would suggest that this is partly related to the market’s negative reassessment of the fundamentals behind the EUR and several other G10 currencies.
“It is not just German data that have disappointed recently. Italian production and industrial orders numbers have disappointed and French output data have also surprised to the downside. It may be too early to draw any strong conclusion about the impact of trade wars on the Eurozone economy, but investors are likely to be weighing up the risks. Additionally it seems very unlikely that President Macron will be able to forge ahead with his reformist programme given the extent of protests in France, while the proximity of the European parliamentary elections in the spring will likely have investors concerned about another wave of populism in the region. In the absence of better Eurozone data we would expect that the EUR will continue to find it difficult to muster significant upside traction vs. the USD.”
“Since both the policies of ECB and the Fed will be data dependent in the month ahead, we continue to expect that USD and the EUR will remains in a sparring contest in the week ahead. Our 1 month forecast remains at EUR/USD 1.14, though we haven’t ruled out the potential for a dip towards 1.12 on a three month view given the potential for a rise in political risk in the Eurozone during the spring.”
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