EUR/USD: Important issues to watch – Danske Bank

Thomas Harr, Research Analyst at Danske Bank, lists down the important issues which are going to impact the direction of the EUR/USD over the course of time.

Key Quotes

“The Trump effect

- Trump’s victory has triggered a substantial rally in the USD driven by two factors:

- 1) Expectations that a substantial Trump-led fiscal easing will lead to higher inflation and a significantly more hawkish Fed.

- 2) Expectations that the Trump administration will give a tax break for US companies to repatriate offshore held earnings back to the US. Estimates suggest that a HIA 2 could drive a substantially bigger USD inflow than the HIA in 2005 where US companies repatriated around USD 300bn and drove the USD stronger.

While 1) and 2) are USD positives, larger US fiscal deficit in itself has tended to coincided with a weaker USD with the exception of the first Reagan period which was accompanied by a rise in real interest rates. We do not expect real interest rates to rise this time.”

“Political risks are rising in the Eurozone

In the Eurozone, there are important political events over the coming year: (1) the Italian constitutional referendum on 4 December, (2) the French presidential election in April/May 2017 and (3) the German election in September/October 2017. In addition, the UK’s PM Theresa May has stated that the government will trigger Article 50 by end March 2017. We view European politics as a negative for the EUR where the Italian referendum and in particular the French election are the biggest risks. However, our base case is that the Eurozone will not fall apart.”