Euro / Dollar Exchange Rate to go Sub 1.0 in 2017

Growing support in polls for French presidential candidate Marine Le Pen has exerted strong downside pressure on the Euro in February as the political risk factor shifts to the Continent.

The Euro to Dollar exchange rate fleetingly broke below 1.05 on Wednesday, February 22 for the first time since early January.

Against the Pound, the Euro broke below £0.8450 for the first time since December.

On a trade-weighted basis, the Euro has fallen to its lowest level since March 2016:

“The FX market fears an election victory of the eurosceptic candidate, who wants to hold a referendum on France’s EU membership and replace the euro with a basket of national currencies. Political support for the common currency is thus crumbling,” says Analyst Antje Praefcke at Commerzbank in Frankfurt.

As noted in a recent report by Deutsche Bank, the demise of the Euro would “go beyond a Lehman moment” for the global economy and rapidly force the Euro below parity against the Dollar.

And more losses are likely, particularly against the Dollar we are told.

“We still expect the exchange rate against the Dollar to fall through parity this year, as the contrast in the policies of the ECB and the Fed proves to be starker than investors are anticipating,” says John Higgins at Capital Economics in London.

Higgins takes a step back from looking at the now well-publicised economic risks that are being written into the Euro and argues the driver for a fall to parity lies in the United States.

“We still think that investors are underestimating future Fed rate hikes. And since we broadly agree with them that monetary policy in the euro-zone is likely to remain very loose for the foreseeable future, this suggests to us that the dollar has even further to rise against the euro – our end-year forecast is $0.95/€,” says Higgins.

On Wednesday, February 22 the US Fed’s minutes for their February meeting communicated a reluctance to push for a March hike owing to ongoing uncertainty surrounding the new administration’s fiscal policies.

A word of caution though from Commerzbank’s Praefcke. The German analyst warns USD investors to beware:

“At the end of the day, prospects for growth and for the Fed’s interest rate policy strongly depend on the fiscal policy plans of the new US government. And the dollar outlook thus remains fraught with risk as long as more precise information on the tax plans or the planned government expenditure is not available.”

The broader weakness in the US Dollar seen in 2017 was due to fresh concerns about Donald Trump’s trade and foreign policy agenda that have since faded.

"As a result, relative interest rate expectations have reasserted themselves as the primary driver of the Dollar’s value against the Euro," argues Higgins. "This in turn has caused the greenback to strengthen again, as interest rate expectations have moved further in favour of the US amid a slew of strong economic data there and a relatively hawkish testimony from Janet Yellen."

Once Trump’s plans are made clear we will get a better steer as to whether the Euro will plunge to fresh multi-year lows.

ECB + Inflation = No Support for Euro

While the Dollar awaits fresh signals to prompt it higher, no such stimulus is likely to be found for the Euro.

Commerzbank’s Praefcke points to the ECB as being unlikely to offer support to the Euro exchange rate.

“An acceleration of the euro area inflation rate in February to 2.0% will not support the Euro. The ECB has already committed to continuing its bond purchases at least until year-end and will not be inclined to start the discussion about an adjustment of its monetary policy, given that critical elections are coming up,” says Praefcke.

In Praefcke’s opinion this means positive stimuli for the euro will be lacking near-term.

Commerzbank forecast the Euro to Dollar exchange rate to trade at a low of 1.03 in the second-quarter of 2017 while the rate should end the year at 1.04.

The Euro to Pound exchange rate is forecast to trade at 0.87 by the end of the year.

In Pound to Euro terms this equates to 1.1494.