EUR: Range-trading into yearend – RBC CM

Elsa Lignos, Research Analyst at RBC Capital Markets, notes that for most of the year, EUR/USD has been directionless, although the width of the range (1.07-1.16) has been enough to offer good trading opportunities.

Key Quotes

“In Q3, that range narrowed to 1.0950-1.1370 and more recently it has narrowed again (1.11-1.13). We look for EUR/USD to end the year around 1.10 (our forecast is unchanged from last month). Technically, there is an important rising trend line that currently comes in at 1.1095. A break of that would open the way for a test of 1.0941/13. Resistance comes in at 1.1270 (falling trend line) followed by the 1.1307-66 region.

The date of the Italian referendum has now been confirmed (December 4) and polls show an even split between Yes and No with a high number of undecided voters. But the potential for early elections (and therefore the possible impact on EUR) has also diminished. Even in the event of a No vote, the main coalition party PD could keep governing. While its majority in the upper house is slim, there is scope to broaden the coalition if necessary.

Beyond political risk, the big dates to watch are Oct 20 and Dec 8 (the ECB’s remaining meetings this year). At its last meeting, the ECB said it would conduct a review of its current policy. Most are expecting that review to conclude by December and the ECB to announce an extension to QE (which is currently set to end in March). If it fails to do so, EUR may squeeze higher but we would not expect it to rally far. A decision to step back from asset purchases right now would be for the ‘wrong’ reasons as inflation still remains very weak.

6-12 Month Outlook – Political risk & no inflation

There are several political events to watch next year. If an EU/EZ referendum were held in a Eurosceptic country, we would expect to see a very dramatic sell-off for EUR/USD (sub-0.70). That sounds extreme but recall during the first Eurozone crisis, USD was generally weak and EUR/USD never broke 1.20. If a second crisis were to hit, with USD at a much stronger starting point, 0.70 would be a relatively conservative target. These are still just tail risks.

For our base case forecast we are focused on the lack of inflationary pressure in the Euro area. Until inflation picks up, the ECB will be stuck at or below the zero bound. Our end-2017 target for EUR/USD is unchanged at 1.05.”