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EUR/USD: Parity this year, not possible - ING

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Feb 24, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    Research Team at ING, suggests that the soft Chinese economic data is stoking fears of a hard landing, reinforcing global risk aversion and weighing heavily on stocks, commodity prices, and vulnerable EM currencies.

    Key Quotes

    “But on top of further monetary easing by major central banks, or a delay in tightening by the Fed, Chinese fiscal policy may stabilise the macro-economy and markets. However, this may not be evident until mid-year, and we do not hold our breath for a strong rebound.

    US growth has shown a marked slowdown. And if this is a genuine loss of momentum, and not just one of those periodic ‘soft patches’ the US experiences, then it is not inconceivable that the US could slide back into recession. Even if this is nothing more than a slowdown, the odds against further tightening of policy in 2016 are growing, and we have reduced our Fed funds forecast from two hikes to one this year, and will be closely monitoring to see if we need to revise further.

    Mario Draghi has hinted that more stimulus could be on its way from the European Central Bank (ECB). Recent activity data has shown that the Eurozone is not immune to financial market turmoil and weakness elsewhere, with recent numbers proving to be disappointing.

    The UK’s referendum on ongoing EU membership looks set to be held this year, with the uncertainty that it is likely to generate set to weigh on activity, asset prices and sterling.

    China’s annual Central Economic Work Conference in December emphasised “supplyside structural reforms”, but the investor-friendly message was overshadowed by worries that the central bank was pursuing a policy of competitive devaluation. We do not believe they are doing so, but it requires action, not words, to persuade investors.

    The Bank of Japan’s surprise decision to introduce negative rates is likely to be followed by further action, perhaps as early as March, if the ECB cuts rates as is widely expected. The plunge in oil prices has been one of the main sources of market turmoil over the past few weeks, with Brent crude prices down by 17% since the start of the year. Although our base case for oil assumes a recovery in prices by 2H16, we consider a ‘lower-for-longer’ scenario in this report, which has prices averaging just US$31/bbl in 2017.

    We are now backing away from our call for EUR/USD at parity this year. A less confident Fed and less scope for higher rates at the short end of the US curve make it hard to now justify new highs for the dollar. Instead, a stand-off involving the Fed, the ECB and the BoJ over currency strength could serve to keep EUR/USD range-bound this year.”
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