The Euro is set to gain ground versus the Dollar and rise to 1.2000 by the end of 2017 says HSBC.
The key driver behind what promises to be a notable rise in the Euro to Dollar exchange rate is actually an expected weakening in the US Dollar due to a shift in focus to the structural realities that stand in the way of President Donald Trump's efforts to further stimulate economic growth.
Theses include the country’s twin budget and trade deficits.
However, an uplift for the Euro will come from a mixture of fading political risk and the European Central Bank (ECB) unwinding their stimulus programme.
This bullish stance on the Euro mirrors a similar stance held by Nomura who we today report expect the Euro / Dollar exchange rate to rise to 1.15 by the end of 2017.
USD Faces Headwinds
Donald Trump’s political promises are seen to be fading quickly as Congress stands in the way of deeper reform. The President’s failure to repeal Obamacare was a case in point and a taste of what’s to come.
As the market starts to realise that his ‘phenomenal’ tax reforms and infrastructure spending programmes are probably unaffordable it will quickly price them out of the Dollar leading to substantial losses.
Even if the government goes ahead and implements them they are not likely to be self-financing as some of Trump’s advisors claim and thus will require borrowing to fund – as happened under Reagan.
Interestingly Trump himself is more sceptical saying he will not be implementing Tax reforms until savings have been made elsewhere – by, for example, repealing affordable healthcare.
With the President’s honeymoon now over the harsh realities of government are likely to weigh on the Dollar.
The incompatibility of Trump’s protectionist trade policies with a strong Dollar are likely to lead to him delaying implementation of certain dollar-positive policies such as the repatriation of overseas profits at a one off 10% tax rate as well as a blanket border tax.
There may even be verbal intervention to keep the Dollar low in order to support his “Buy America, hire America” mantra.
Euro to Rise
Meanwhile the single currency is set to rise as it finally enters a new upcycle linked mainly to the ECB unwinding their ultra-loose policy stance but also as political risk from anti-European parties starts diminishing.
“Politics is also switching in the Eurozone. This time from a negative to a positive. The results of the first round of the French election have provided us with the reassurance that the EUR rally will start in earnest from now. In similar fashion to the Dutch election, there is little evidence of a hidden populist vote that could see a eurosceptic candidate sweep to victory. The market may not want to fully extract the political risk premium from the EUR until the second round is complete on 7 May, but to us this now looks like only a question of time,” says HSBC's chief foreign exchange strategist David Bloom.
As far as ECB policy goes, the expectation is for the central bank to announce a tapering of QE at their September meeting, and an end to QE at the start of 2018.
“The market will spend much of H2 2017 trying to divine when the next taper step will be delivered. In other words, the market will spend the rest of this year looking for the next step towards the exit by the ECB, and this should be EUR supportive,” says Bloom.
Bullish Technical Analysis
The chart of EUR/USD shows the pair is probably changing trend, from down to up, and this change could be an early sign of the fundamental shift alluded to by Bloom.
The pair has broken above the key March 27 1.0909 highs and this signals a probable change in the broader trend as it establishes a new sequence of higher highs and higher lows.
The gap higher on the news of Macron’s win also established the exchange rate above the 200-day moving average, which would be expected to provide it with support from now on as moving averages are important levels of dynamic support and resistance on charts.
Of course, there is a chance of some ‘backing and filling’ before more upside develops but the outlook remains constructive overall.
It now looks increasingly more likely that the pair will move up to resistance form a trendline in the 1.14s, initially.