Jane Foley, senior FX strategist at Rabobank, suggests that as the EUR is faced with its own share of domestic economic and political risk, they continue to see scope for EUR/USD to dip back to the 1.12 area on a 3 month view.
“Since the start of this year, economists’ hopes for a rebound in German growth have been gradually eroded. In the second half of 2018, Germany hardly grew at all.”
“It is widely feared that the report has the potential to open to door for more tariffs on European auto imports to which Germany would be particularly sensitive. Germany’s car lobby has pushed back as has Chancellor Merkel. The markets took the news to mean that there was an increased chance of the ECB resorting to extra liquidity to support economic activity levels in the coming year or so. While the EUR has clawed back some ground vs. the USD this morning after having dipped towards the EUR/USD1.1234 area at the end of last week, we continue to view the single currency as vulnerable.”
“It is not just changing markets views with respect to ECB policy which could serve to undermine the EUR in the weeks ahead. Spanish politics is again in a state of upheaval. It seems likely that after the next general election a more hard line approach towards Catalan Separatists will be taken, this suggests risk of a rise in tensions.”
“Independently, a replacement will have to be found for ECB President Draghi this year. Faced with this level of uncertainty we see scope for EUR/USD to dip towards 1.12 on a 3 month view.”