Euro Forecasts 2017 to 2018 from Commerzbank

Commerzbank have updated clients with their latest set of foreign exchange forecasts for the period 2017 through to 2018.

The key takeaway from the German bank is that the Euro exchange rate complex is likely to remain anchored near present levels with analysts noting the European Central Bank (ECB) as being unable to provide any upside support via raising interest rates and/or cutting back on its Asset Purchase programme.

This stands in contrast to the US Federal Reserve which is embarking on a cycle of interest rate rises which is to lend support to the Dollar.

The Bank of England is meanwhile not expected to raise interest rates until 2018, being sidelined by the uncertainty created by the Brexit process which is due to get underway in March 2017.

The release comes on the same day that we are seeing broad-based Euro strength as political risks associated with upcoming elections in the Eurozone recede and an oversold EUR/USD springs back taking other Euro-based pairs alongside.

Takeaways:

"Initially the monetary policies of the Fed and ECB will continue to drift further apart, putting pressure on the EUR-USD exchange rate.

"The ECB will be forced to reduce the volume of its monthly bond purchases towards year-end 2017, however. That will have a positive effect on EUR short term.

"While we believe the ECB will announce the gradual end of its asset purchase programme in the autumn, the positive effect of this tapering on the currency will be dampened by increasing anti-European sentiment in the Eurozone, which is endangering the stability of the Monetary Union and forcing the ECB towards a long-term expansionary monetary policy.

"With a view to Brexit negotiations, our working assumption is that ultimately there will be an amicable agreement. However, uncertainty will remain high for a long period so that Sterling will not recover for the time being.

"Uncertainty about the further course of the new US administration remains high.

"The market currently has high hopes that new US president Donald Trump will launch a major economic stimulus package, as he has frequently promised. But these hopes could be disappointed in the end. Furthermore, the much-discussed border adjustment tax, which would have a positive effect on the USD according to many economists, is unlikely to be introduced.

"Against this backdrop, we still feel comfortable with our forecast of only very moderate USD appreciation this year."