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Jane Foley, senior FX strategist at Rabobank, suggests that since the start of this month EUR/USD has crept higher by over 2% with a significant surge following this morning’s news that the UK and the EU had agreed a Brexit deal.

Key Quotes

“Brexit is clearly a factor in the move with optimism with respect to Brexit buoying the pound and rubbing off on the EUR. That said, USD weakness also appears to be contributing to the move in EUR/USD. This raises the question of whether the greenback is being subjected to profit-taking or if we are seeing the start of a more prolonged period of weakness in the USD.”

“This morning’s news that the UK and the EU have agreed on a Brexit deal has injected a fresh shot of enthusiasm into GBP. Over the past week the EUR has been clinging to GBP’s coat-tails as optimism regarding the prospects of a deal grew. The fact that no side was walking away from the negotiating table, combined with the fact that the Benn Act should in theory rule out the prospect of a hard Brexit on October 31 resulted in a significant degree of short-covering in GBP since the start of this month.”

“Looking forward we continue to expect upside potential for the single currency will be limited by the weak German economic backdrop and by speculation that the ECB could ease policy further in the months ahead. Clearly the outlook for EUR/USD also depends on the broad performance of the greenback.”

“We have been USD bulls since March 2018 and the DXY dollar index has been trending higher throughout the ensuing period. Supported by the Brexit-effect it is likely that this month’s pop higher in EUR/USD is related to profit-taking. That said, it is useful to re-evaluate the factors that have been driving USD strength in this period in order to assess whether its resolve is being to wane.”

“Given the risks to global growth, we expect USD demand to remain well underpinned in the coming months. That said we do expect some broad-based slippage in the USD next year based on our assumption of an aggressive step up in the pace of Fed rate cuts. Our 3 month forecast for EUR/USD is 1.07 and our 12 month forecast is 1.12.”