A chart of EUR/USD for the last two years is instructive in that it
reveals the pair traded in a tight 1.05-1.15 range; a remarkable period
of stability and one not seen during the single currency’s lifetime
until now. Of course this sideways move followed a 25% or so slide in
the EUR during 2014 as the ECB moved into QE and the USD started its own
25% rise against a number of major and EM currencies. Even still with
Brexit, Trump, a Greek and (now brewing) Italian crisis, EUR/USD’s
steady state is notable.
From a big picture perspective and as we gaze into 2017, we assume
with some conviction that if EUR/USD could not sustainably rise above
1.15 during that period, then with the Fed set to hike rates as the US
economy moves closer to employment and inflation targets and as the
Trump presidency opens up a whole slew of further potential USD
positives, while the ECB will be buying bonds at least until end 2017,
there is little chance of 1.15 being breached anytime in the coming
months either. The broad USD of course has already risen by 4% since
Trump’s victory, in anticipation of possible increased fiscal spending,
tax cuts, repatriation flows and attendant hawkish Fed response, but
there could be more gas in the tank here for the USD, once the
President-elect gets into office and pushes for some ‘easier’ wins.
Caution is evident though with the USD off its peak as investors ponder
potential trade spats or difficulty in passing pre-election pledges.
EUR/USD the Trump election victory has been the only development in a
year capable of forcing the pair down through levels of support around
1.10 and 1.08 to the range bottom at 1.05. To be fair, the
prospect of European political turmoil thanks to anti-establishment and
populist backlashes – emphasised by the Trump result following Brexit -
have pulled support from the EUR too. The
range for EUR/USD then looks to have shifted lower and whatever we
think of European politics and the ECB, the 1.08-1.10 area now looks
like a top.
The ECB’s APP changes come against an improving economic outlook now
absent deflation risks. We aren’t convinced the ECB should need to be
buying bonds at the rate of EUR60bn per month past September 2017 (the
latest commitment is through end-2017) but understood that against the
present political backdrop, it had to deliver a dovish message. The
shift to be able to buy lower tenor bonds and those yielding below the
-0.4% deposit floor is ‘an option, not a necessity’ - which we take to
mean may only be used if yields generally fall amid an economic slump or
a failure of longer-term yields to rise, negating a steepening curve
that aids the banking sector. But these are issues for later in 2017 and
for now investors at large, it seems, see the ECB’s actions as newfound
reasons to be bearish.
Thus we continue to look for a decline in EUR/USD to 0.98 end Q1, though H1 may be more apt in a new 0.98-1.08 range.