EUR/USD: Recovers In January On Trump Reflation Doubts; What’s Next?

EUR/USD is trading on higher ground, but hesitating around 1.08. What’s next?

Here is their view, courtesy of eFXnews:

The euro strengthened in January as the Trump reflation optimism that helped reinforce monetary divergence between the euro-zone and the US faded as President Trump focused initially on protectionism and immigration policies following his inauguration on 20th January.

However, we were not surprised by that given executive order actions were always going to be the first steps taken. We continue to expect evidence to emerge of increased focus by President Trump on working with Congress in order to advance a policy agenda focused on lifting economic growth through an infrastructure spending program and tax cuts.

That is likely to reinvigorate expectations of a divergence in monetary policy that will see renewed declines in EUR/USD to levels below parity. The stance of the ECB remains extremely accommodative and we suspect this to some extent reflects fears over financial market turmoil that could be sparked by a period of high political uncertainty over the coming months.

By far the most important political event will be the French presidential elections on 23rd April and 7th May. We do not expect Marine Le Pen to win but do expect increased nervousness in the build-up to the election. A snap election in Italy is also now possible given the Supreme Court’s decision to alter election rules that makes it more difficult for one party to dominate in the Lower House of parliament. Assuming though that Le Pen fails in her bid to become President of France we see grounds for the euro to recover the losses recorded in H1 in the second half of the year. The recovery is not just a story of a more favourable political climate. We also then expect the ECB to begin to express greater confidence over the outlook for both growth and inflation. The data already suggests a modest pick-up in growth is under way while the balance of risks in relation to inflation also appears to be shifting.