The euro is on track for a second weekly gain against the US dollar, supported by expectations of a narrowing of the policy gap between the Federal Reserve and the European Central Bank. While political risks persist in France and Germany, the euro is expected to maintain its upward momentum over the next six to 12 months, said Lee Hardman and Abdul Ahad Lockhart, currency analysts at MUFG.
Political risks in France and Germany attract market attention
“Euro is on track for a second straight week of gains against the US dollar. This helped lift EUR/USD back near the 1.1700 level as the US dollar weakened broadly ahead of next week’s FOMC meeting. The euro is benefiting from market expectations that the policy divergence between the Fed and the ECB will continue to narrow going forward as the Fed continues to cut interest rates to neutral while the ECB has already gotten there and will likely leave interest rates unchanged now.”
“Eurozone political risks mainly in France have dampened the euro’s bullish momentum in recent months. The French government has yet to pass next year’s budget which has the potential to spark a renewed wave of political risks before the end of the year, although we assume they will stick with the current budget and try again early next year if Parliament fails to pass next year’s budget in time.”
“Bloomberg also reports that political risks in Germany may attract some market attention today. The ruling coalition government’s pension bill will be voted on today and the final vote in the Bundestag is scheduled for around 12:30pm local time with the result expected to be announced around 1pm. There has been reported to be a risk that the bill could be rejected. While we remain wary of political risks in Europe, we do not expect it to derail our forecast for the euro to rise further against the US dollar over the next year. 6-12 months.”
