ABN Amro: EUR/USD Forecast to 0.95

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A new Regan era in the United States will keep the pressure on EUR/USD argue analysts at Abn Amro.

The Euro continues to bounce along the bottom of its long-term range against the Dollar in the vicinity of the 1.0450-1.07 region.

However, a break below this support should ultimately materialise argue foreign exchange strategists at ABN Amro.

Although the US Dollar has already strengthened by over 5% (on a Trade Weighted basis) since Donald Trump’s election, more strength is to come. 

“President-elect Trump’s program has similarities with that of Ronald Reagan in the 1980s. President Reagan was able to boost America’s self-esteem; his policies gave a strong boost to US growth during his first term and restrictive monetary policy kept inflation in check. This resulted in a substantial rally of US dollar (+43%) in his first term,” say Abn Amro.

One key difference is that the rally this time may be more short-lived, however, argue Abn Amro.

Donald Trump’s policies are likely to lead to a pick-up in growth and inflation to above-trend levels.

Aggressive easing from the Federal Reserve is also probable.

“We expect six rate hikes over the next two years, compared to the just over four currently priced in by futures markets,” say Abn Amro.

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The combination of all these factors is likely to lead to a substantial rally in the Dollar.

The Euro, meanwhile is likely to weaken as a result of increasing political risk:

“We expect the EUR/USD to break through parity also fueled by rising European political risk and an extension of ECB QE.

“However, a soon as expectations of ECB taper (which we expect from March 2018) start to build in the market at the turn of 2017-2018, this will likely lead to a recovery in EUR/USD."

As a result of this ABN Amro expect the EUR/USD pair to fall to 0.95 by the middle of 2017.