Thursday 18, May 2017 by William Mullally

Euro: Enjoying support

A more optimistic economic outlook of the ECB, more positive sentiment and positive economic data surprises are supportive for a stronger euro in the next three months. The longer-term euro outlook is more challenging as the return of political risk with Italian elections in 2018 will be a test for the ECB’s ability to reduce monetary policy stimulus, writes David Kohl, Chief Currency Strategist, Julius Baer

A more optimistic economic outlook of the ECB, more positive sentiment and positive economic data surprises are supportive for a stronger euro in the next three months. The longer-term euro outlook is more challenging as the return of political risk with Italian elections in 2018 will be a test for the ECB’s ability to reduce monetary policy stimulus, writes David Kohl, Chief Currency Strategist, Julius Baer

Reports are circulating about a more optimistic economic assessment by the European Central Bank (ECB). And we believe that the ECB is getting increasingly ready to allow speculation about less forward guidance, fewer bond purchases and even the possibility of interest-rate hikes or at least a less negative deposit rate. This speculation should support the euro in the coming months allowing EUR/USD to drift higher to 1.11 in the next three months despite a rate hike in the US.

Speculative positioning in the EUR/USD cross turned positive last week for the first time since May 2014, which is a remarkable improvement in euro sentiment. Positive economic data surprises in the Euro zone deliver additional support for the euro outlook.  Together with the better backdrop for the euro, the low risk environment has pushed EUR/CHF above 1.09 over the past few weeks. This development makes it easier for the Swiss National Bank to prevent the CHF from appreciating.

The honeymoon around the political change in France has the potential to keep the CHF at this weaker level in the coming months. The longer term outlook for the euro is, however, less rosy. 2018 provides once again challenges from the political front with Italian elections being a major risk factor. The USD and the CHF would be natural profiteers once these political risks return.

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