22 Dec 2014
EUR/USD: downside risks? – Rabobank
FXStreet (Barcelona) - Jane Foley, Senior Currency Strategist at Rabobank, forecasts EUR/USD to move to 1.20 levels in 2015, with downside risk, noting that the Fed is likely to govern the outlook for USD in coming months and the ECB may have less control over the EUR.
Key Quotes
“EUR/USD is this morning trading moderately above the overnight 2 year low of 1.2220. As liquidity dries out ahead of the Christmas break is it likely that conditions could stay choppy. That said, there are still plenty of driving factors for the currency pair between now and the end of the year. Not only is the proximity of technical support at 1.2220 likely to tantalise the dollar bulls, but uncertainty about the timing of Fed and ECB policy decisions and the question mark above Greek politics could ensure a feisty finish to trading in the currency pair this year.”
“While the Fed is likely to govern the outlook for the USD in the coming months, the ECB may have less control over the EUR. The upward trend of the euro effective exchange rate from late 2012 into early 2014 can be linked with the recovery in demand for peripheral debt.”
“We expect that the ECB will start buying government debt as part of QE programme by the end of Q1. In theory this should depress interest rates across the curve and so lower the attraction of the EUR. However, it is unclear if the commencement of this policy will trigger further inflows into peripheral debt which would be EUR supportive.”
“In addition, the Eurozone may have to contend with another wave of political uncertainty from Greece while this would likely weigh on the value of the EUR, it would also bring unwanted stress.”
“Greek PM Samaras has promised a general election at the end of next year in return for support of his Presidential Candidate Dimas this month. On the event of insufficient support for Dimas, early elections are likely to be called and opinion polls suggest that the far left Syriza would win power. Since it would be difficult to reconcile the demand of Syriza with those of the troika, uncertainty would again prevail in the Eurozone. For now we forecast a move to EUR/USD 1.20 in 2015, with downside risk.”
Key Quotes
“EUR/USD is this morning trading moderately above the overnight 2 year low of 1.2220. As liquidity dries out ahead of the Christmas break is it likely that conditions could stay choppy. That said, there are still plenty of driving factors for the currency pair between now and the end of the year. Not only is the proximity of technical support at 1.2220 likely to tantalise the dollar bulls, but uncertainty about the timing of Fed and ECB policy decisions and the question mark above Greek politics could ensure a feisty finish to trading in the currency pair this year.”
“While the Fed is likely to govern the outlook for the USD in the coming months, the ECB may have less control over the EUR. The upward trend of the euro effective exchange rate from late 2012 into early 2014 can be linked with the recovery in demand for peripheral debt.”
“We expect that the ECB will start buying government debt as part of QE programme by the end of Q1. In theory this should depress interest rates across the curve and so lower the attraction of the EUR. However, it is unclear if the commencement of this policy will trigger further inflows into peripheral debt which would be EUR supportive.”
“In addition, the Eurozone may have to contend with another wave of political uncertainty from Greece while this would likely weigh on the value of the EUR, it would also bring unwanted stress.”
“Greek PM Samaras has promised a general election at the end of next year in return for support of his Presidential Candidate Dimas this month. On the event of insufficient support for Dimas, early elections are likely to be called and opinion polls suggest that the far left Syriza would win power. Since it would be difficult to reconcile the demand of Syriza with those of the troika, uncertainty would again prevail in the Eurozone. For now we forecast a move to EUR/USD 1.20 in 2015, with downside risk.”