ING look at Eurozone / US economic growth differential as a euro driver
Most of the dynamics for EUR/USD over the past 12 months can be captured by the simplicity of relative Eurozone versus US economic growth outlooks
- Between April and October 2017, consensus expectations for 2018 US and Eurozone GDP narrowed by more than 0.4 percentage points - during which the EUR gained by more than 15% against the USD
- Since April this year - and when risks of a global trade war ramped up - the expected US-EZ 2018 growth differential has widened by around 0.3ppts, with EUR/USD moving almost 10 big figures (~7%) lower
- In effect, the median expected growth differential has gone from pricing in a narrative of economic convergence to a narrative of economic divergence - the latter occurring due to some unexpected negative demand shocks in Europe (eg, bad weather, Italian politics and trade war risks)
where things go next
- while EUR/USD may have found an interim stabilising point above the 1.15 level - to truly gauge what the next big 5 figure directional move will be, one needs to make an assessment on whether the median expected US-EZ growth differential diverges even further - or in fact starts to show fresh signs of converging again.
- The latter is the most compelling to us at this stage - with exuberant US growth expectations getting moderated as the cost of Trump's trade war take its toll on the domestic economy
- We've flat-lined our EUR/$ forecast at 1.17 for the coming months - but we're now pretty much watching out for any clear incipient signs that shed light on which way the median US-EZ growth differential is heading.
(bolding mine)
