EUR/USD is still looking for a direction for 2017, but the team at BTMU sees it quite clearly:
Here is their view, courtesy of eFXnews:
The euro spent much of 2016 at levels higher than the 2015 closing level (and our forecasts) but then fell sharply in the aftermath of the surprise election victory for Donald Trump. The high expectations of reflation of the US economy, fuelled by aggressive fiscal stimulus are set to continue supporting the US dollar versus the euro in H1.
The monetary policy divergence dynamic faded as an FX influence last year but we expect it to play a bigger role in EUR/USD direction in 2017. That is in part due to the very downbeat stance of the ECB, which revealed a high degree of concern over the outlook for the economy at the last meeting of 2016 on 8th December. The fact that the ECB extended QE through to the end of this year means QE will no doubt extend into 2018 underlining the widening divergence in monetary policy with the US. The ECB remains concerned over the outlook for growth with the ECB maintaining its view of “downside risks” persisting. ECB President Draghi sees “uncertainty everywhere” suggesting the need for continued aggressive easing. No doubt part of the ECB’s pessimistic assessment reflects the potential for an escalation in political uncertainty this year.
The spread of populism is a real risk for Europe this year with opinion polls pointing to Geert Wilders Freedom Party possibly winning the largest number of seats in the general election on 15th March. Marine Le Pen is also expected to get through the first round of the French presidential election to face Francois Fillon in the second round on 7th May.
While we expect Fillon to be the next President of France, increased political risks ahead of the election will likely see EUR/USD trade below the parity level in Q2.
The unfavourable mix of monetary policy divergence and heightened political uncertainty is set to fuel further EUR/USD selling in the first half of this year.
After trading for a long period between 1.0500-1.1500, the breakout to the downside toward the end of last year is a strong indication of further declines to come.
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