EUR & ECB: Missing Reasons to be cheerful

The prospects for some idiosyncratic EUR rise remain bleak. The ECB stands behind the September easing package that is insufficient to change the eurozone growth and inflation outlook, yet is sufficient to keep the no-longer-undervalued EUR an unattractive currency.

ECB easing plans intact...

The ECB meeting was largely a non-event for markets and the euro, with the ECB fully reiterating its decision from September (see ECB Review). If anything, the ECB's view of increased downside risks to the euro area growth and inflation outlook since then (as evident in the deteriorating eurozone and German economic data) confirms the appropriateness of the September policy decision. Importantly, despite the rise of dissenting voices since the September meeting, this wasn't reflected in the statement.

... but insufficient to change the EZ growth and inflation outlooks

As we discussed in EUR & ECB: Details, details, details we see the ECB September policy package as not sufficient to change the EZ growth and inflation outlook. This, coupled with the conditional forward guidance on the persistent recovery in inflation, points to a prolonged period of QE and a fairly low risk of imminent monetary policy normalization. This, in turn, means a lack of idiosyncratic euro upside catalysts (in the absence of meaningful German stimulus – which we also don’t see as imminent) and a non-appreciating euro.

EUR/USD to move back below 1.10 this year

Rather, we need to see some weakening USD dynamics first for the EUR/USD to start appreciating on a persistent and trend-like basis. However, with the Fed unlikely to pre-commit to a meaningful easing cycle and the still uncertain US-China trade negotiations, we see EUR/USD upside for the remainder of the year as limited and expect the cross to return back below the 1.10 level this year. We only see some modest upside to EUR/USD next year (to 1.15 by end 2020) once we reach a more meaningful resolution to the US-China trade conflict and the US authorities prefer a softer dollar ahead of the presidential election in November next year.

Figure 1: EUR/USD is not undervalued as its BEER fair value declined

Source: ING

EUR/USD is not undervalued

With EUR/USD no longer being under-valued (Figure 1) any EUR/USD upside should be more gradual and less abrupt than was the case in 2017 and early 2018 when the currency rallied from deeply undervalued levels. As per G10 FX valuation: Why the dollar is not screamingly expensive, we estimate that the cross’s fair value has deteriorated by around 7% since the start of 2017.