Jeremy Stretch and Bipan Rai, analysts at CIBCl explained that given internal data disappointments and downside risks to the outlook including Brexit and upcoming elections, euro strength looks to be further in the future and less material than previously thought. They forecast EUR/USD at 1.17 by Q2 2019 and at 1.20 by Q4.
“Markets have paid attention to the ‘state-dependent’ portion of the ECB’s guidance, meaning that the weak data of late, particularly in the core, has led markets to price out an initial rate hike from the ECB from later this year until early next year.”
“Both Brexit and the US-China trade negotiations represent key risks, although the former likely represents a more direct shock to the EU economy in the event that an agreement is not reached. As a result, the ECB has acknowledged that the balance of risks to its outlook is now to the downside.”
“Of course, there are other endogenous risks as well. Spain is heading back to the polls this Spring, while the European parliamentary election in May could see a rise of right-wing populist parties, if the recent regional election in central Italy was any indication. Additionally, there are roughly EUR722 billion of TLTRO loans set o
mature this year, and the ECB must decide whether or not to extend those loans. The economy continues to decelerate, and while we don’t expect it to deteriorate further, it likely will not improve until mid-year at the earliest.”
“We’ve revised our expectations for the ECB to hike slightly later than expected this year, and our EUR projection profile is accordingly flatter.”