EUR/USD was hit by Draghi’s dovishness but when things get quiet, it manages to stabilize and recover. What’s next?

Here is their view, courtesy of eFXnews:

A chart of EUR/USD for the last two years is instructive in that it reveals the pair traded in a tight 1.05-1.15 range; a remarkable period of stability and one not seen during the single currency’s lifetime until now. Of course this sideways move followed a 25% or so slide in the EUR during 2014 as the ECB moved into QE and the USD started its own 25% rise against a number of major and EM currencies. Even still with Brexit, Trump, a Greek and (now brewing) Italian crisis, EUR/USD’s steady state is notable.

From a big picture perspective and as we gaze into 2017, we assume with some conviction that if EUR/USD could not sustainably rise above 1.15 during that period, then with the Fed set to hike rates as the US economy moves closer to employment and inflation targets and as the Trump presidency opens up a whole slew of further potential USD positives, while the ECB will be buying bonds at least until end 2017, there is little chance of 1.15 being breached anytime in the coming months either. The broad USD of course has already risen by 4% since Trump’s victory, in anticipation of possible increased fiscal spending, tax cuts, repatriation flows and attendant hawkish Fed response, but there could be more gas in the tank here for the USD, once the President-elect gets into office and pushes for some ‘easier’ wins. Caution is evident though with the USD off its peak as investors ponder potential trade spats or difficulty in passing pre-election pledges.

For EUR/USD the Trump election victory has been the only development in a year capable of forcing the pair down through levels of support around 1.10 and 1.08 to the range bottom at 1.05. To be fair, the prospect of European political turmoil thanks to anti-establishment and populist backlashes – emphasised by the Trump result following Brexit – have pulled support from the EUR too. The range for EUR/USD then looks to have shifted lower and whatever we think of European politics and the ECB, the 1.08-1.10 area now looks like a top.