OANDA Updated Q2 FX Quarterly Outlook: A patient period is upon us

EUR/USD poised for a breakout

Of all the advanced economies, the eurozone is the weakest link and that can clearly be seen with the euro.  A key theme at the beginning of the year was German weakness.  Recessionary concerns pretty much eliminated any chance for the ECB to deliver on their 2018 guidance of a rate hike before ECB President Draghi’s eight-year term ends on October 31^st.

Price action on EUR/USD had the tightest quarterly range since the common currency began two decades ago.  With both the Fed and ECB signaling they are hold for the foreseeable future, the dovish tug of war will likely see a slightly stronger reaction to the European story.  The US economy is slowing but we are probably not going to see new easing measures anytime soon.  The eurozone is starting to show signs of a stabilizing and we could see the following catalysts support a significant move.

• Germany’s weakness from deteriorating global factors should improve on fiscal stimulus, additional monetary policy and a boost from a trade deal between the US and China.
• Once the US finishes their trade war with China, the focus will shift to the Transatlantic one with Europe. This war will likely focus on zero tariffs, zero non-tariff barriers and zero subsidies on non-auto industrial goods.  While an immediate resolution is not expected, this trade war is expected to be much shorter than the US-China trade war.
• If Europe stabilizes, a key determining factor on how soon the ECB raises rates will depend on who will replace Draghi. Expectations have wavered on who will take the reigns, with current expectations favoring German central-bank President Jens Weidmann.  If he does get the nod, that could be very bullish for the euro.  Weidmann, however, may see opposition from France, so we should not be surprised if someone like Bank of Finland Governor Rehn become the top candidate.

Content is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Business Information & Services, Inc. or any of its affiliates, subsidiaries, officers or directors. If you would like to reproduce or redistribute any of the content found on MarketPulse, an award winning forex, commodities and global indices analysis and news site service produced by OANDA Business Information & Services, Inc., please access the RSS feed or contact us at info@marketpulse.com. Visit https://www.marketpulse.com/ to find out more about the beat of the global markets. © 2023 OANDA Business Information & Services Inc.