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Jane Foley, Senior FX Strategist at Rabobank, notes that the EUR/USD pair has settled close to the 1.15 area and suggests that they look for the pair to move towards the 1.12 area by the middle of next year.

Key Quotes

“Not only has the EUR been undermined this year by the dovish forward guidance from the ECB, but Italian budget concerns have reinvigorated political anxiety within the Eurozone.”

“It is another week before Italy has to officially submit its budget to the EU. It is already clear that EU officials are dissatisfied that the populist government is looking to run a budget deficit of 2.4% of GDP, which is too large to allow for a meaningful reduction in the country’s huge debt burden.”

“There is the risk that the European Parliamentary elections in 2019 give Brussels a different flavour, in which case the populist movement in Europe could have far larger ramifications for the markets and the EUR.”

“Given this environment, the EUR could be faced with increased political uncertainty into the early months of next year.”

“Although we see scope for further downside pressure in EUR/USD in the months ahead, H2 2019 could bring a fresh set of concerns. By then we expect that the Fed’s interest rate cycle will have peaked.   It is possible that the boost to the US economy from Trump’s tax cuts will have peaked and that in an environment of slower US growth that the market will be paying more attention to the US budget deficit.   After a trough around EUR/USD1.12 around the middle of next year, we expect EUR/USD to end 2019 trading around 1.15.”