EUR/USD Pair to Fall Gradually, Say Analysts at Citi

 

The bank holds its short positions open in view of both short and medium-term downside factors prevailing.

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EUR/USD’s slide since the election of Donald Trump is set to continue say forecasters at Citibank.

One of the factors dictating its decline is the less confident rhetoric coming out of the European Central Bank’s (ECB) headquarters in Frankfurt.

“ECB has softened their tone after the Trump victory.

“Concerns on the growth outlook for Europe as well as EU stability have limited a follow through in the “hawkish” rhetoric picked up last week,” say Citi.

Another reason for expecting more Euro weakness is the impact of more general political stability concerns since Trump’s win.

“Several of the Euro’s anchors have been questioned after Trump’s victory.

“Eurozone stability, European trade and political relations are all longer-term drivers for Europe.

“They will change, possibly undermining investor confidence in the macro outlook for 2017/2018,” said Citi.

One interesting point they also make is that, “unlike the US, political surprises in Europe are unlikely to bring “fiscal stimulus.”

This means that if a hard-right, anti-establishment party wins in Europe it will probably not open the exchequer’s coffers and start a spending spree.

Orderly Depreciation

Citi may be bearish for the Euro but they don’t see a sharp slide, rather an “orderly” decline’.

This they base on the fact that key medium-term drivers for the Euro are likely to be outperformed by the same drivers for the Dollar.

These key medium-term drivers are based on the balance between money exiting and entering the Eurozone, in the form of Foreign Direct Investment,

Portfolio Flows and Current Account Flows.

Whilst these have generally favoured the Euro previously, the rise in US yields and a positive outlook for US assets, in general, suggests the US will see a rise in flows, which outpaces that seen in the Eurozone.

The growing difference between flows for the two currencies is likely to favour the dollar in the medium-term.

One interesting offsetting influence which would slow declines for the Euro is likely to come in the form of a fall in Eurozone portfolio outflows during 2017 as the ECB starts to taper its monthly bond purchases.

Demand from the ECB often uses up all available supply of bonds thus forcing fund managers to look outside of the Eurozone, and therefore leading

Euro-weakening outflows.

The impact of these factors will be slow and measured, however - explaining the ‘orderly move lower’ in EUR/USD envisioned by Citi.