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EURUSD: Waving goodbye to parity – 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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    Chris Turner, Global Head of Strategy at ING, suggests that it looks increasingly difficult to forecast EUR/USD hitting parity this year.

    Key Quotes

    “Our prior call for a low of 0.98 in 2Q16 had been premised on higher US inflation and bearish flattening of the US Treasury curve, which would drive the dollar side of this story. Yet, with the oil profile a lot lower than we had expected and fears of the US slowdown spreading, we now see 1.05 as the low point for EUR/USD this year.

    When justifying the rate hike last year, Fed ‘neutrals’/‘hawks’ highlighted that neither the dollar nor oil prices would continue to adjust at their 2015 pace forever. This meant that their depressing influence on US headline would abate. The problem for the Fed, however, is that oil prices have continued to plunge and the dollar has continued to surge against major US trading partners, such that the expected return of inflation to target now likely looks to be delayed.

    Indeed, big early-year falls in Asian FX and NAFTA trading-partner currencies of CAD and MXN have continued to propel the Fed’s broad trade-weighted dollar ahead at a 10% pace. A Fed model released late last year suggested that such a move could knock 0.5% off core inflation and up to 1.5% off GDP, but crucially, GDP is hit with a longer lag.

    What this all means is a less-confident Fed and US authorities possibly getting sucked back into a global currency war. With ING dropping one Fed hike out of the profile this year and contemplating whether to remove his other forecast hike as well, we can no longer justify a view of US market interest rates driving the dollar to new highs.

    Instead then, we see EUR/USD largely trapped in a 1.05-1.15 range this year, where the top-side should be limited by the threat of more aggressive ECB action. That said, it would probably take much more substantial QE from the ECB rather than a modest 10-20bp cut in the deposit rate for the ECB to drive EUR/USD substantially lower.

    A similar scenario applies to USD/JPY. Here, it looks like the BoJ is prepared to cut rates further into negative territory to avoid the JPY strengthening too quickly. The range appears to be 115-125. We do see more downside risks to USD/JPY, however. If the US slow-down were to accelerate, fears over the lack of available BoJ tools to address JPY strength could see outside risk of a USD/JPY move to 110.”
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