EUR/USD: Rotating political risk? – Rabobank
The analysis team at Rabobank explains that even though the latest headlines from Washington were a driving force behind the latest push higher in the EUR/USD, the EUR’s attractiveness has certainty improved in recent weeks
Key Quotes
“The latest political shockwaves coming from Washington have further depressed market hopes that the Trump Administration will have the energy and commitment to enact an aggressive stimulus programme in the coming months. Irrespective of the impact of the latest scandal on Trump, since the GOP’s first failed attempt to replace Obamacare earlier in the year, it has been clear that deep divides within the party were already a hindrance to the Administration’s agenda.”
“This morning EUR/USD also traded at its best levels since last November. Although the latest headlines from Washington were a driving force behind the latest push higher in the currency pair, the EUR’s attractiveness has certainty improved in recent weeks. CFTC data for the EUR last week put net speculators’ positions in positive territory for the first time since May 2014. The victory of Macron in the French Presidential election and the better than expected performance of the Eurozone economic recovery in the year to date have been instrumental in lifting confidence. For the time being, Europe appears to have put a lid on a wave disruptive, political tides just when the US Administration appears to be becoming increasingly bogged down by a set of headwinds, mostly of its own making.”
“The support for Merkel’s party in regional elections in Germany at the weekend and the associated boost to her chances of retaining her position in the national election in September has also bolstered the perception that politics could remain in the back seat in Europe at least until the run up to the Italian election, which must take place by the spring 2018. The fact that there has been an improvement in European economic data also contrasts with the spate of softer than expected number that have been churned out in the US recently, most notably from the Q1 GDP report, and last week’s releases of April retail sales and CPI inflation data.”
“Although EUR/USD has reached our long-standing 1.10 year-end target and is on course for moving towards our 12 month forecast of 1.12, we have been cautious about pushing up our forecasts for the currency pair. The approaching Italian election suggests that the EUR reprieve from political apprehensions could be short-lived. Meanwhile there is a strong likelihood that the debate regarding a reduction in the Fed’s balance sheet will receive an airing in the coming months. Any reduction in the balance sheet should be a bullish USD factor. Also, technical indicators suggest that the EUR/USD1.11 area could be difficult to claim. Since momentum indicators are approaching stretched levels, there is risk that the rally may run out of steam. Initial support is offered by the May 8 high at EUR.USD1.1023.”