Euro to to Reach 1.17 Against US Dollar by May, Due to ECB Policy Shift

Swiss lender Credit Suisse expect the EUR/USD exchange rate to reach 1.17 by year end due to a policy shift by the European Central Bank away from targeting exchange rates.

Euro forecast to rise to 1.17

Mario Draghi’s bombshell admission that the ECB would not be envisioning any further rate cuts, which led to a surprise about-face in the EUR/USD exchange rate, was part of a general shift by the ECB away from cutting rates and trying to devalue the euro, to concentrating on credit easing instead, according to Shahab Jalinoos, Head of Global FX strategy at Credit Suisse.

“In our view the key catalyst for the reversal was ECB chief Draghi's suggestion that the ECB is close to the end of the road in terms of pushing further on negative rates as a policy tool. We have argued a shift in the policy mix for further easing away from negative rates (previously seen as targeting a weaker currency as a key objective) towards credit easing can be viewed as a potential positive for the EUR.”

Without the ECB trying to push the euro lower, the risk of further down-side for the currency is limited. 

They see further upside for the pair potentially coming from dollar weakness caused by the increasing chances that an anti-establishment candidate such as Donal Trump will win the Presidential election.

Credit Suisse describe such political sources of risk as a ‘Trumpxit’ - the possibility that Donald Trump might win the election – and that this will weaken the dollar in the short-term, due to concerns the his policies will force the US to withdraw from the global economy and become more insular.

As such Credit Suisse now see the exchange rate rising from its current levels to 1.17 by May 9 2016.

Diverging Outlooks

Credit Suisse’s outlook diverges from that of investment bank Morgan Stanley, who recently resurrected their bearish EUR/USD parity call.

Systemic weakness in the Euro-zone banking system was seen as a major reason for their bearish opinion of the euro.

Analysts at the bank say a triple-witching of balance-sheet build-up of non-performing loans, narrow credit spreads due to the ECB’s policy of negative deposit rates, and weak credit transmission to the wider economy is bad for Euro-zone banks and generating a negative outlook for the currency.