Political risks continue to weigh on the euro, which slipped on Monday to a 16-month low against the dollar. We’ll likely see an even weaker euro later in the week but long-term prospects for the currency look good, analysts say.
Against the US dollar, the euro slipped on Monday to its lowest level in 16 months, at just $1.125. The single currency struggles elsewhere too, with morning losses across the board. Against the resurgent New Zealand dollar (N$1.668) and Australian dollar (A$1.561), it slipped towards 5-month and 2-1/2-month lows respectively.
For investors, political risks continue to be reason enough to swerve the euro. Further to a lack of progress on Brexit, the budget battle between Italy and the European Commission might reignite this week. In October, the Commission rejected Italy’s 2019 fiscal plan on the grounds of it failing to guarantee a decrease in the nation’s debt. The Commission gave Italy until Tuesday to propose a new plan but, despite threats of disciplinary action from Brussels, there is little to no sign that the Italian government is ready to compromise.
The euro is now down more than 10 percent from its 2018 highs and isn’t likely to offer much in the way of upside in the near term.
Danske Bank points to “continued downside risks,” even at current sub-$1.13 levels. “Technically, we have taken out key support,” Danske says, and this “opens up a test of the June ’17 bottom at 1.111–1.112.”
“A break down to new lows for the year to levels just below $1.12 looks possible this week,” writes ING.
The biggest fear among traders is that politics will spill over into monetary policy. It’s already being speculated that the ECB’s Governing Council might need to push back its first interest rate hike, especially given poor economic data of late. At the end of October, data from Eurostat showed GDP growth for the euro area of only 0.2 percent in the third quarter—half of the median economist forecast—and this week, preliminary data for Germany is expected to show economic contraction.
Citibank, though, are sticking with highly optimistic long-term forecasts for the euro. In 2020, the US bank sees it buying $1.30, “underpinned by the less accommodative policies of the ECB.”