prospect for divergent monetary policies returning to reassert
themselves as a material influence on EUR/USD seems greater in the
coming months than it has been this year.
As the US labour market tightens, the prospect of a recovery in
business investment is rising as firms substitute capital for wages and
as skill shortages intensify. As the oil price stabilises and the US rig
count increases, the drag on investment from the oil price collapse
should stabilise. Consumer confidence is at post-GFC highs and average
earnings growth is gradually picking-up (September +2.6% y/y). Wealth
effects could also be a source of significant support. In Q2 2016, US
household net worth was USD89.1trn – up sharply from USD56.2trn at the
end of 2008. The savings rate has normalised (5.7%) and while there are
material issues with inequality, under a new President, middle class tax
cuts should help support future consumption. This economic backdrop
seems materially more upbeat than in Europe.
There are elections planned in the Netherlands, France, and Germany,
and if Italian PM Renzi fails in the 4 December referendum – which
opinion polls suggest he will – there may be an election in Italy. The
question of European integration given economic underperformance,
immigration, Brexit, etc., all suggest some political risk premium for
the euro and an overreliance on easy monetary policy for growth.
A lower EUR/USD looks probable – as does EUR underperformance against higher yielding APAC currencies.
Whilst forecasting direction in EUR/USD has been frustrating and fraught with many potholes over the past twelve months, the balance of fundamental risks seem to be stacking up in favour of USD strength in the coming months. We look for a move below 1.05 over the coming months.