EUR/USD stable, range bound between 1.04 and 1.10 - Natixis

Research Team at Natixis explains that after a low at 1.0340, the EUR/USD gradually picked up, setting a high at 1.09, mainly because of the weaker US dollar and because of European political risks having subsided.

Key Quotes

“The general elections in the Netherlands were reassuring, while political risks in France have decreased, the probability of a Frexit looking more remote. There is also the fact that European growth seems more solid than expected and inflation is higher (2.0% in February), fuelling expectations of a premature end of the European Central Bank’s asset purchase programme. Ewald Nowotny, a member of the Governing Council, floated the idea that the deposit rate could be raised before the end of the year, which contributed to the steepening of the Eonia forwards curve and to the appreciation of the EUR/USD.”

“Despite the EUR/USD’s rebound in the first quarter, we remain cautious as regards the outlook for the single currency over the short to medium term. On the one hand, the US dollar should end up recovering on news of Trump’s tax reform. On the other hand, domestic factors in Europe having contributed the euro’s appreciation appear to have been blown out of proportion. French political risks have decreased, but they have not disappeared. As for the monetary tightening by the European Central Bank later this year, this seems rather premature. Core inflation (i.e. without food and energy) is still low at 0.9% and will remain this way for a prolonged period.”

“Furthermore, the risk that the European Central Bank will start to taper asset purchases this year will keep peripheral bonds under pressure and hold back European growth. In this respect, we expect this tapering to stretch over much of 2018, with no increase in the deposit rate until the end of 2018. There follows that the monetary policies of the European Central Bank and the Federal Reserve will continue to diverge, the spread between the US and EZ 10-year rate widening further, driving down the EUR/USD. At the same time, short euro positions held by speculative accounts remain small, which suggests that the pair’s rebound potential is of the same order.”

“Given recent developments in the US (delays pushing through reforms), we have nonetheless adjusted our 2017 scenario for the EUR/USD. In the short term (April), the EUR/USD could test 1.10 if details regarding Trump’s tax reform are slow being announced. Further out, the EUR/USD should go back on the retreat in the run-up to the 14 June FOMC meeting, declining to 1.034, which we now see at this year’s low (when previously we were expecting parity). We then expect the pair to appreciate gradually towards 1.07 at end-2017 in reaction to the ECB tapering announcement, the process itself being expected to be very gradual in 2018.”