EUR/USD: Shift in G10 pressure points - Rabobank

According to Jane Foley, Senior FX Strategist at Rabobank, the 6% surge in the value of EUR/USD from its April low to its high earlier this week illustrates the shift in G10 pressure points. 

Key Quotes

“The broad based gains in the value of the EUR this week are clearly correlated with relief.  The success of Macron in the first round of the French Presidential election indicates that a pro-EMU candidate is all but certain to win the Elysee in the second round election next month.   That said, it should be noted that the EUR has been on an appreciating course all year.  Measured from the start of the year only the JPY can claim to have appreciated vs. EUR by a significant margin.  The EUR is virtually unchanged vs. the AUD, GBP, SEK and DKK and noticeably stronger that the CHF, NOK, USD, NZD and the poorly performing CAD.  The fact that the relief rally in the EUR is so well established could limit upside potential near-term, though we still see scope for further broad-based EUR appreciation by the end of 2017.”   

“At the end of last year, the EUR was bogged down by a slowing growing Eurozone economy and by perceived political risk in Europe.  On the heels of the shock waves that had followed the Italian referendum on constitutional reform, Brexit and the Trump victory, investors had started to fear that cracks in EU coherence could widen 2017.  By contrast, opinion polls at the start of this year were stressing that a liberal-centrist candidate was likely to win the French Presidency.  When the Dutch election last month confirmed that populist PM would not be taking the helm in the Netherlands, political risk abated further.”

“Coincidentally, an improvement in European PMI data and higher headline CPI numbers triggered a debate about whether a reduction of monetary policy accommodation would soon become appropriate in the region.  The result has been progressive short-covering pressures in the EUR over a period of four months.  Given that the better tone in the EUR is so well established, the improvement could slow unless investors find fresh motivation.”

“This week’s ECB meeting will ensure that attention is diverted back to monetary policy.  This week’s moves in Eonia forward rates has been equivalent to a 30% rise in the implied probability of a deposit rate hike by December even though the ECB’s current guidance suggests that it is unlikely to make any actual changes to policy before the end of this year.  That said, in preparation for a potential end of unconventional measures in 2018, it is possible that the Governing Council will gradually change its tone over the course of 2017.”

“Already in March ECB President Draghi indicated that there was no longer a sense of urgency with respect to policy measures.  Going forward we expect further changes in language regarding the ECB’s guidance or its economic outlook.  Broadly speaking a less dovish ECB should be EUR supportive.  If the Trump administration fails to push through Congress a substantial tax package, disappointment could undermine the USD.  There would now appear to be upside risks to our long held year-end target of EUR/USD1.10.”