Weekly Eurozone – Lower USD appreciation path for the end of the year

by: Georgette Boele

The sentiment on the US dollar has deteriorated. The main reasons are the following. For a start, US economic data have come in weaker-than-expected especially the below-consensus US employment report. As a result, the market is now positioned for a later Fed tapering and has also scaled back expected rate hikes in 2015. We have also delayed our Fed tapering call to March. This has made the USD a less attractive currency to invest in. In fact investors are now tempted to use it as a funding currency in carry trades. Finally, the market has realised that the political discussions on the fiscal side will likely resurface again in the near future and this will hang over the market i.e. keep the USD on the defensive. Consequently, we have raised our year-end EUR/USD forecast from 1.28 to 1.35. Still, we believe that market expectations on the US economy and the USD have become too negative, so there remains room for an upside surprise. Moreover, we expect the ECB to stay dovish. Therefore, we still see a slightly lower EUR/USD for year-end.

 

131028 - Eurozone FX EUR_USD