EUR/USD En-Route To 0.95; Parallels With The Reagan Era

0

Euro/dollar reached a double-bottom at 1.0520 but has bounced nicely since then. What’s next? The team at ABN AMRO is very bearish:

Here is their view, courtesy of eFXnews:

Since the US presidential elections the US dollar has firmed against most currencies. While it has risen by more than 5% against the yen and 3.5% against the euro, the sharpest moves have been against a number of vulnerable emerging market currencies.

For instance, the US dollar is up by 10% against the Mexican peso and around 7% versus the Brazilian Real and South African Rand. This reflects the combination of higher US growth expectations, higher US equities and higher US Treasury yields, as well as capital outflows from EM due to the unwinding of carry trades.

President-elect Trump’s program has similarities with that of Ronald Reagan in the 1980s. President Reagan was able to boost America’s self-esteem; his policies gave a strong boost to US growth during his first term and restrictive monetary policy kept inflation in check. This resulted in a substantial rally of US dollar (+43%) in his first term. However, a key difference is we expect the period of strong US economic growth to be more shortlived compared to the Reagan era so the dollar rally would likely be of shorter duration.

Another up leg in the dollar… We have upgraded our forecasts for the US dollar based on early views about the impact of Mr Trump’s economic agenda. We now expect a substantial pick-up in US growth and inflation to above-trend rates. In addition, we expect the Fed to hike rates more aggressively than anticipated by financial markets in order to dampen inflation expectations and actual inflation over the medium term.

We expect six rate hikes over the next two years, compared to the just over four currently priced in by futures markets. This combination of strong US growth – which will also be above inflation in 2017 – , wider yield spreads and a rise (less negative) in US real yields (official rates minus inflation) is bullish for the US dollar. Therefore, we now expect that the US dollar rally has another leg upwards. It is likely that this move will run out of steam once financial markets have anticipated the strong pickup in growth and more monetary policy tightening. In addition, the move could start to unwind in 2018 when yield spreads start to narrow, US growth starts to slow and expectations start to surface that the Fed will pause its rate hike cycle.

lWe expect the EUR/USD to break through parity also fueled by rising European political risk and an extension of ECB QE.However, a soon as expectations of ECB taper (which we expect from March 2018) start to build in the market at the turn of 2017-2018, this will likely lead to a recovery in EUR/USD.

ABN-AMRO targets EUR/USD at 1.05 by the end of Q1 ’17 and at 0.95 by the end of Q2 ’17.

For lots more FX trades from major banks, sign up to eFXplus

By signing up to eFXplus via the link above, you are directly supporting Forex Crunch.

Get the 5 most predictable currency pairs

About Author

Yohay Elam – Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I’ve accumulated. After taking a short course about forex. Like many forex traders, I’ve earned a significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I’ve worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.

Comments are closed.