EUR/USD: Stability To Persist Short-Term But Gains Unlikely Sustainable
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USD: The US dollar weakened by 0.6% on a DXY index basis in July with all of that depreciation and some more coming on the final trading day of the month in response to weaker than expected real GDP data for Q2. Real GDP growth has now been very subdued for three quarters, averaging just 1.0% over that period, adding more uncertainty to the economic outlook. However, we expect better growth rates in Q3 and Q4 and for the Federal Reserve to raise the federal funds rate in December.
Risks are skewed to the downside for the dollar over the short-term with economic uncertainty reinforced by political uncertainty ahead of the presidential election on 8th November. While downside risks are evident we still expect the dollar to be broadly stable as weak growth abroad and central bank easing in response provides support for the dollar. Once the election has passed and the Fed lifts rates as economic and political uncertainties fade, the dollar is set to perform well.
EUR: The increased economic and political uncertainty in the US that is set to weigh on the US dollar is likely to result in continued stability for the EUR/USD rate.
There are now perhaps greater upside risks over the short-term given the euro-zone large current account surplus will add to the attraction of the euro in circumstances of increased uncertainty.
However, any gains for the euro are unlikely to be sustained given eurorelated risks may also intensify. Increasing episodes of terrorism ahead of key elections in France and Germany next year which follow the constitutional reform referendum in Italy in October mean scope for EUR appreciation is limited.
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