EUR outlook impacted by the Eurozone’s trade positioning – Rabobank

According to Jane Foley, senior FX strategist at Rabobank, how the EU positions itself in the global arena will have implications for political coherence in the Eurozone and there will be consequences for trade, investment and growth, which means that the outlook for the EUR will also be impacted.

Key Quotes

“When the UK leaves the EU, the latter will lose a tangible proportion of its total GDP. According to Eurostat the UK contributed 15.2% of total EU GDP in 2017.”

“A lack of coordination is also visible in other areas. Greece has become a member of China’s 17+1 initiative which aims to strengthen cooperation between Beijing and 17 states in Central and Eastern Europe and the Balkans.”

“Italy has also forged closer ties with China by endorsing its ‘Belt and Road’ initiative earlier this year despite criticism from both within the EU and the US. That said, under the Trump administration the traditional links between the EU and the US have become strained in various areas.”

“A step up in trade tensions between the US and the EU would come as a blow to business confidence, investment and growth potential in the region. The direct negative implications for the EUR would likely be compounded by concerns regarding the broader consequences regarding Europe’s ties with the US under the current administration.”

“We would argue that over the past year or so, the EUR/USD exchange rate has been dominated by demand for the greenback. Structural factors such as the strength of the USD in the global payments system and the increase in dollar demand resulting from growth in emerging market have ensured that dollar strength has confounded the market consensus.”

“Additionally, the easing measures announced by former ECB President Draghi and the slowdown in German growth have placed pressure on EUR/USD this year. While we expect aggressive easing from the Federal Reserve to soften the profile of the USD in H2 2020, we expect downside for the USD to be protected by structural factors.”

“Meanwhile, any recovery in the EUR will be dependent on the outlook for Eurozone growth and ECB policy but it may also be influenced by negative perceptions regarding political coherence. We see risk of EUR/USD dropping down to 1.08 on a 3 to 6 month view before edging higher towards 1.12 in 12 months.”