© Peter Frank
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We think that the current range is what we are going to see through the first quarter. However, around March, supposedly, the Euro could dip a little bit closer to the parity level. At this point, we are looking at a fairly narrow range of 1.02-1.07 during the Q1. Our view is that we are going to keep seeing erratic movements on the market, with the Euro generally heading with lower lows into the end of March ahead of the Article 50 signing.
Furthermore, we think that the new US President will start to unveil a long list of fiscal pump-priming measures that should be more positive for the US Dollar than for any other currencies including the Euro, which should drive EUR/USD a little bit lower. Nevertheless, we are not negative on the Euro but we are definitely more positive on the Dollar.
What would be the major headwinds for EUR throughout the same period?
I think that there will be two big domestically-related factors just inside the Euro area. Firstly, we will have the electoral cycle beginning, namely, the Dutch election around the term between the Q1 and Q2, then, when we get into the Q2, we will have the French election; thus, again, March will be tricky for the Euro. The Dutch electoral issue, in turn, is the big risk factor given the strong showing in the polls of the populist leader, while the French election, the first round of which is in April, will bring a lot of news headlines and anti-EU comments that could be antagonistic towards the Euro. In case Marine Le Pen is at the top of the first round which is quite possible, that does not mean that she will win the second round (we think that she will not), bringing up a number of other negative Euro risks associated with that political cycle.
Another negative issue would be triggering of the Article 50. As Mark Carney suggested in his speech in the beginning of the year, the Brexit will be negative for the Euro and the Euro zone could be eventually far worse off than the UK if they take a hard line with Britain.
Overall, these two big downside headwinds (the domestic Euro area political cycle risk from the elections and the way the Euro zone is going to respond to the triggering of the Article 50) are two very important Euro risks. While everyone is aware of the first, the second is probably being underestimated by the market that is still focusing on the Brexit risks to the UK and the Sterling rather than to the Euro zone.
On the macro side, the Euro zone data is improving and the overall trend was very good over the Q4: we saw five-year highs in some of the PMIs for things like industrial activity and business sentiment, while consumer confidence kept rising. Hence, we had a decent recovery from the poor third quarter, therefore, I suppose that as long as there is no really big "train wreck" in the political cycle, the consumer confidence, business confidence, etc. should continue to support the Euro and help it to stabilise and possibly hold back weakening dramatically against the Greenback. Against the background, we see only a mild drop in EUR/USD.
What would be your forecasts for EUR/USD, EUR/GBP for the Q1 of 2017?
Talking about the EUR/USD currency pair, we have it finishing at 1.03, though we are not denying the possibility of it dropping below that level. Thus, we see it sliding a little bit; however, we do not see parity or sub-parity for this quarter.
The EUR/GBP currency pair we expect to trade around 0.88 by the end of Q1, but again, a lot will depend on the nature of the UK politics around the time of triggering of the Article 50. Clearly: the harder the Brexit, the higher EUR/GBP. In the short term, quite negative pressure is expected on the Sterling with a lot of emphasis on a "hard" Brexit. However, it might be that people do not necessarily understand the fact that the negotiations will start on an antagonistic level; we will see a lot of bargaining between the UK and the Euro zone, pointing to a very "hard" Brexit, which would keep EUR/GBP elevated.