EUR/USD: To trade into a 1.00-1.10 range next year: 2 reasons - RBS

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    From analysts at the Royal Bank of Scotland:

    EURUSD looks set to trade into a lower 1.00-1.10 range in 2017 after marking a 1.05-1.15 range for the last two years.

    First,  the European Central Bank is set to extend its €80bn a month of asset purchases when it meets on December 8 until the end of 2017. Chart 3 shows the ECB continues to face inflation well below its de facto 2% target. October's headline CPI reached 0.5%y/y on the back of energy base effects and RBS expects it to rise as high as 1.6%y/y in 2017. But core inflation remains stuck at 0.8%y/y. October's ECB minutes said 'underlying inflation had still not shown clear signs of an upward trend' and this week President Draghi said there was 'no sign yet of consistent underlying price pressure'. RBS forecasts core inflation will only be 0.7% in 2017 and 0.9% in 2018, prompting the ECB to extend quantitative easing throughout next year.

    Second , the Eurozone faces key elections including the Netherlands' on 15 March, France's two rounds for its presidential elections on April 23 and May 7 and Germany's federal election in H2'16.

    Ahead of next year's elections, Italy holds its constitutional referendum on December 4. The risk that Italy's government falls if it loses next month's vote or the Dutch and French elections lead to political parties taking office committed to leaving the EU will keep the EUR weak throughout H1'17.

    The key upside risk for the EUR is the ECB tapering asset purchases before the end of 2017.  Long term fair value for EURUSD is around 1.15-1.20. If the ECB considers exiting its bond buying it will allow the EUR to start recovering its losses.

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    The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

    This article appears in: Investing , Forex

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