Euro lingers around two-year lows amid political noise and divergent momentum
The euro continued to languish near two-year lows in recent weeks, ending 24 May at USD 1.12 per EUR, barely unchanged from the same day in April. May’s result represented a 2.0% depreciation from the start of the year and a 4.4% decline from the same day in May 2018. The uncertain external environment has weighed on the euro and the trade-exposed Eurozone economy; meanwhile, the dollar, which is seen as a safe-haven currency, has gained ground. In addition, a dovish ECB and moderate economic momentum has kept the currency at low levels, while activity in the U.S. has generally held up well so far.
Politics at home has also played a role amid noise surrounding May’s European elections, Brexit and some national concerns. The European parliamentary elections confirmed the expected fragmentation and polarization in the union as populist parties increased their presence in the Parliament, which could make consensus-building and passing legislation tougher. That said, while the Parliament has a role in shaping EU policy, agenda-setting powers reside with the heads of states. Moreover, the vote exposed cracks in some members’ governments, leading to snap elections in Greece and increasing uncertainty over how much longer Italy’s unlikely coalition government can survive.
Looking ahead, our panel sees the euro regaining modest lost ground in the second half of the year, before strengthening in 2020. Commenting on ING’s outlook for the euro, chief economist Peter Vanden Houte, elaborates:
“Despite the slightly better than expected 1Q19 GDP figure, Euro area growth concerns remain and the market will be wary of the ECB’s meeting in June where details of TLTRO III will be announced, cementing low rates. Additionally, the wild card of European elections and Washington’s threat to impose tariffs on auto imports hang over the Euro this summer. […]
We see no reason to change our 1.10 EUR/USD forecast for end June 19. We have, though, recently scaled back the expected EUR/USD recovery into 2020/21, but importantly keep the view that widening US deficits and the mature business cycle means that the dollar peaks this year.”