The problem with Europe is Europe – Rabobank

In view of the Jane Foley, Senior FX Strategist at Rabobank, one of the notable themes of May’s January 17 speech was her attempt to re-frame why UK voters had chosen to leave the EU. 

Key Quotes

“While this could be a source of debate for many years to come most would agree that one issue concerns the need for more reform in Europe.  Comments made by Italian Finance Minister Padoan that “the problem with Europe, is Europe” indicate that finally the establishment is beginning to understand something that millions voters have known for quite a while – that mainstream politicians are being seen as part of the problem rather than the solution to prevailing woes.  In the final months of last year, the Italian referendum on constitutional reform focussed the market on the political hurdles that Europe faces this year.  The failure of opinion polls to predict either the UK’s Brexit vote or the Trump victory in the US Presidential election arguably made the market more sensitive to the risk that voters in the Netherlands, France and Germany would move in droves away from centrist governments and vote for monumental change.  That said, while the far right will likely see increased support in this year’s elections, it is still likely that centrist governments will prevail.  This raises the prospect of relief rallies for the EUR during the course of this year.”   

“Since the start of the year the better tone of German inflation and activity data have been supportive for the EUR.  Even though ECB Governor Draghi has dismissed the prospect of higher inflation as a “high class problem” and not one that the Governing Council discussed in January, the better data has triggered a debate in Germany about the appropriateness of the ECB’s current loose monetary policy settings.  Assuming the far right do not sweep to power in Europe this year and on our view that the BoE refrains from hiking interest rates, we expect EUR/GBP to move higher this year.  The risk to our year end forecast of 0.89 by year-end is skewed to the upside.”