Commerzbank have updated clients with their latest foreign exchange forecasts for 2017.
The German bank note that the key driver for the Euro and Dollar will be the continued divergent paths in monetary poly between the Fed and ECB which will put further pressure on the EUR-USD exchange rate.
"Trumpflation (higher inflation expectations after the US presidential election) is encouraging the market to increasingly believe in a rate hiking cycle by the Fed. This is lending support to the US dollar. This development could become a self-reinforcing process. We expect more rapid USD appreciation," say Commerzbank in a foreign exchange briefing to clients.
However, parity will be avoided.
But, “the downtrend in EUR-USD is likely to slow in late 2017 as the ECB will be forced to reduce the volume of its monthly bond purchases. That will have a positive effect on EUR short term,” say Commerzbank.
Commerzbank's counterparts at Deutsche Bank are one of the more notable institutions anticipating a 1:1 exchange rate for the pair.
At their December meeting, Commerzbank expect European Central Bank (ECB) policymakers to extend quantitative easing once again at current levels, but in the course of next year it could become clear that the ECB will be compelled to reduce the QE volume.
This should support the single currency.
“Even if the ECB tries to substitute QE with other measures, it will not be able to avoid giving the impression that it is running out of expansionary instruments,” say Commerzbank.
This should support the euro and prevent a collapse of EUR-USD to extreme territory. The bank therefore leave their forecast for end-2017 (1.04) unchanged.
Pound Sterling should suffer from Brexit uncertainty and easy BoE monetary policy in the short-term, with potential to appreciate again once an amicable agreement between the EU and Britain emerges.
The US Dollar is forecast to enjoy a strong year.
“If the process of rising inflation and Fed expectations is now getting underway, there will be a chance of the US currency rapidly appreciating,” say Commerzbank.
Despite slowing growth in the coming quarters, CNY will not materially depreciate against the dollar since the central bank will dampen capital outflows via administrative measures.