FX CURRENCY WATCH
normalisation process, which we expect to happen between the end of this year and the start of the next. This is because we believe the ECB – barring an unexpected deterioration of the macro scenario – will provide information on the exit from the QE after the German elections in September, and announce a first reduction in purchases in December.
In correspon- dence with de v elo p - ments at the beginning of May, the specula- tive market reversed, turning long
should continue to generally range trade, mostly in the medium-low end of the EUR/ USD 1.10-1.15 corridor, with the possibility of a temporary drop into the EUR/USD 1.10-1.08 band. Range trading should also be the result of the prospect that the ECB is approaching policy reversal,
revised inflation projections downwards, and not only for this year. Should inflation disappoint, the ECB could postpone the start of the QE exit process.
US data will become increasingly important, as they will play a decisive role in guiding the Fed’s decisions for next year
euro after staying short
uninterruptedly for three years (Fig. D). In our view, this signals not only a change in sentiment towards the single currency, but also that the upside reversal of the euro may be considered as having begun this year:
the
movement of the exchange rate, and the repositioning of inves- tors, came at a time when devel- opments both on the economic and political fronts proved fa- vourable for the euro on both sides of the Atlantic. However, this does not necessarily imply an extension of the uptrend.
In the near term, the euro 44 FX TRADER MAGAZINE July - September 2017
although for now it must leave both rates and QE unchanged (thus compressing the euro’s upside margin), while
at the
same time the Fed is preparing to hike rates again (probably in September), but will then put the hike cycle on hold, to start normalising its balance sheet (which will compress upside on the dollar, and therefore the euro’s downside margin). The possibility of a
drop to ( just) below the
EUR/USD 1.10 mark is kept alive by the risk that inflation in the euro area will further delay returning on course for target: at its June meeting , the ECB – while
revising its
Risks to the baseline scenario are starting to lean upwards, i.e. the euro could prove stronger than expected, es p e cia l ly in the event of negative d e v e lo pment s in the United States, as the market has by
now effectively priced in the prospect of another Fed hike by the end of the year, and this leaves the dollar more exposed to a further weakening in the near term. However, we stick to our baseline scenario, according to which the euro will not rise to levels higher than last year’s (EUR/USD 1.15-1.16) on a one-year horizon to take into account the risks tied to the Italian elections, which will be held by next spring, and because in the course of 2018, while the ECB will exit QE, the Fed will continue to hike rates (it currently envisages three moves, whereas
the market is growth forecasts upwards – only pricing in one).
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