EUR/USD: Towards 1.30 Or Towards Parity After The US Elections
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The one of our views that meets the most resistance, is that EUR/USD has a better chance of breaking 1.30 than breaking parity, whatever happens today.
The surge in populist voting is perceived, on this side of the Atlantic, as a serious threat to the European project. Am I too blasé on this, after years of seeing little political change in the face of economic under-performance as the over-bearing desire to bind Europe closer together conquers all other emotions?
In the short term, EUR/USD remains in a tight range only because the ECB has succeeded in crowding European investors out of domestic bond markets and as they invest abroad they re-cycle the current account surplus. But, they do so in a way which prevents the Euro from bouncing rather than helping it weaken any further. The ECB can’t buy bonds any faster, and any major shock to investor confidence would hurt appetite to invest overseas.
Hence, the danger that we see the Euro rally at some point, in exactly the same way as we saw the Yen rally in Q1. The market is simply unprepared for that possibility.
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