UK lender Barclays have informed clients to expect notable Euro weakness in 2017 as the ECB continues with its effort to reflate the Eurozone economy.
The worst two-week run for the Euro against the Dollar since March 2015 has strategists at Barclays saying the exchange rate will slip below parity in 2017.
The EUR/USD exchange rate has fallen from an opening of 1.1070 in the week starting November 7 to 1.0630 at present.
Having closed at 1.0589 in the week ending November 18 the pair has endured the worst successive two-week run for the exchange rate since March 2015.
"The EUR/USD is still limping, now below 1.06. It could absolutely collapse next week as the dollar appreciates further. The market seems convinced that the Fed will hike interest rates in December and tighten its belt further in 2017. Meanwhile the ECB and other major central banks are widely expected to maintain their current extremely loose policy stances intact well into 2017 at the very least," says Fawad Razaqzada at Forex.com.
It's no wonder that analysts are getting excited by the prospect of EUR/USD parity.
According to data gathered by Bloomberg in a survey of the financial services sector there is now a 43% that EUR/USD will sink to parity within a year. This is almost double the probability assigned a week ago.
Barclays have on Thursday November 17 written to clients expressing similar views.
In a note titled ‘FX Views for the Year Ahead’ Barclays say no currency is more exposed to both core rates steepening and the politics of rage than the EUR.
“We look for further near-term EUR weakness towards 1.05 in Q4, in the lead-up to the Italian referendum, as markets begin to price into the EUR a risk of an EMU-threatening event in the next year,” says the note.
The main driver of the EUR trend will likely be the ECB, with two-sided risks for the path of the single currency.
“A miscommunication of the message that tapering is not tightening, in the context of poor euro area investment and inflation, will likely be seen as a policy mistake and result in material EUR depreciation, while further euro area resilience adds upside risks to our projected EUR path,” says Barclays’ Marvin Barth in London.
Under Barclays’ base case, the ECB announces tapering in March but is effective in communicating that it retains the power to reflate the economy, keeping a gentle but sustained downward trend in EURUSD.
Factoring the bank, forecasts EURUSD at 1.01 by Q2 17 and 0.99 by year-end 17.
But, to get anywhere near parity, Forex.com's Razaqzada says the EUR/USD will first need to break and then hold below the prior support around the 1.0460/1.0525 area.
"As things stand, this looks like a good possibility for the reasons stated above. However, as always, it is worth remembering that the markets are forward-looking. As such, the outlook for the diverging monetary policy stances in the Eurozone and US may already be priced in, if not fully then may be partially. But price needs to confirm this view by creating a distinct reversal pattern. Until and unless such a technical signal is generated, the path of least resistance remains to the downside," says Razaqzada.
US Dollar to Strengthen
Barclays meanwhile expect the USD to strengthen in the year to come particularly vis-à-vis EM currencies.
"Potential anti-immigration and anti-trade policies in the US undoubtedly would not bode well for the developing economies, while the EUR could suffer as political risk premia increase towards the heavy political agenda next year," says Barclays analyst Aroop Chatterjee.
However, the USD will likely lose ground versus the JPY, as Japan seems isolated from the antiglobalisation, anti-establishment global policy shift.
Lloyds: No Parity, but Forecast Targets Downgraded
Barclays’s fellow high-street lender Lloyds Bank have also this week updated their commercial clients with forecasts for the Pound.
Lloyds have informed clients of an upgrade to their GBP/EUR forecast but they remain bearish on the Euro.
As is the case with Barclays, Lloyds are eying the ECB as being a source of Euro weakness in 2017.
“The Euro is expected to remain under pressure, given expectations that the ECB will announce an extension of QE next month beyond March 2017. This reflects ongoing political risks, sluggish growth and little sign as yet of significant domestic inflationary pressures, despite existing stimulus measures,” say Lloyds in a briefing on the matter.
Lloyds have revised down their EUR/USD target to 1.05 from 1.08 for mid-2017 and to 1.06 from 1.07 for end-2017.