EUR/USD to Rise as Meat of Dollar Rally is Behind us says ABN Amro

Further upside gains for the US Dollar is looking increasingly unlikely according to findings by ABN AMRO Bank NV.

Accordingly, analysts have written to clients saying they have changed their forecasts for the Dollar against the Euro.

"Although there could be some temporary waves of positive US dollar sentiment, we think that  it is unlikely that we will see another strong US dollar rally from here on," says strategist Georgette Boele in a note dated January 23.

Boele says that she has been “disappointed” with the performance of the US Dollar, which recently stopped rising after the release of positive data or hawkish Fed commentary, signalling, in her view that, “most of the positive news is already reflected in the price.”

She further points to falling real yields in the US, which are recognised as a strong indicator of the future trajectory of the Dollar. With real yields dropping the Dollar is expected to follow suit eventually.

The real yield is the difference between the interest rate and inflation.

Positioning

Boele also looks at positioning data which is substantially long the Dollar.

She claims this overly bullish positioning is based on investor expectations that Donald Trump will deliver on his fiscal stimulus plans.

However, she states that it is vulnerable to disappointment if the plans are not as generous as had been hoped.

“Investors are positioned for US dollar strength. Investors have already upgraded their views for the US economy and their expectations about the Trump fiscal stimulus are high.

“Up to now, President Trump has not delivered the details that investors are looking for and the risk has increased that the impact of the stimulus may come later than anticipated.

“Investors don’t have a great deal of patience. So if it takes too long or the package falls short of expectations they will probably close their large long dollar positions.”

Negative Rhetoric

The Dollar gained a huge amount of initial impetus after Donald Trump’s election win as his reflationary and protectionist policies were seen as Dollar-positive.

After noting how the overly strong Dollar might work against the benefit of his own pro-US made trade policies, however, Trump decided to talk down the buck in what markets are possibly taking as a bad sign for the future.

“Recent rhetoric from the new US Administration that currencies such as the Chinese yuan, Japanese yen and the euro are undervalued and that the US dollar is too strong has weighed on the greenback,” said Abn’s Boele.”

Euro to Rise

The Euro to US Dollar pair could very well rise in the future, says Boele, as not only has she reassessed and downgraded her outlook for the Dollar but she has also upgraded her outlook for the Euro.

Despite pressure from political uncertainty weighing on the Euro, Abn Amro do not expect the elections in France, Holland or Germany to result in negative outcomes for the Euro, as the odds still favour overall majorities which are EU positive.

“We expect Italian spreads to widen, but we don’t expect systemic risks to return to the Eurozone. In fact, we are quite constructive on the outcome of the Dutch and French elections. If we are right about these results, this should support the euro,” says the ABN AMRO strategist.

EUR/USD Forecasts

Abn forecast EUR/USD at 1.05 in Q’s 2 and 3.

Once ECB tapering expectations start to build in Q4 2017 the expect EUR/USD to rise towards 1.10, which is their new year-end 2017 forecast.

For 2018 they continue to expect the US dollar to weaken across the board and to start its downturn.

“By then the positives for the US economy and the Fed rate hikes will be fully anticipated and central banks in other

countries will probably stop easing and move towards a more restrictive monetary policy,” said Boele.

Her new year-end 2018 forecast for EUR/USD is 1.20.