The latest from ANZ, their weekly FX Insights, focusing on the euro
In summary:
- The current discouraging blend of political uncertainty and receding interest rate expectations in the US have contributed to the dollar's sell-off
- The euro area's financial conditions remain very accommodative, suggesting the recent rise in the euro won't choke the recovery
- Further gains in EUR/USD look plausible, although there are likely to be limits to the ECB's tolerance for a stronger euro
- The trading range shifting up to 1.10-1.20
More:
- there may be limits of tolerance to extended euro appreciation and we would not be surprised to see some resistance emerge should EUR/USD meaningfully breach 1.20
- From a US perspective, the FOMC is closely monitoring the current dip in inflation and could pause on rate normalisation until it becomes more confident this weak phase is passing
- The US growth story, meanwhile, is well discounted and it is difficult to argue for anything more than a moderate growth outlook oscillating around 2.0%
- It will require fiscal expansion and measures to raise productivity to improve that outlook. So far, the Trump administration has not implement its planned economic stimulus and the ongoing investigations into Trump's campaign and business dealings risk further side tracking the policy agenda
- The anticipated expansionary fiscal/tightening monetary policy mix has become unstuck for the moment and against the backdrop of the more positive euro area environment, EUR/USD is responded accordingly for now.
