2017 EUR/USD Annual Forecast

EURUSD had a strange sort of an year in 2016 as the Euro as such did not have much of a volatility but all the attention and the volatility was more to do with the US dollar than the Euro. The only major event of the year for the Euro came towards the end as the ECB announced a continuation of its QE program which was expected to come to an end by March 2017. The ECB announced in December that it would continue the program till atleast the end of 2017 and would continue to be in the markets till 2018. This was a disappointment to the Euro bulls who had been expecting a tapering of the program in due course of time.

The pair did manage to reach a high of 1.16 for a brief period in May but from that time, it has been a slide all year long except for a brief period just after the election of Trump as the President of the USA, when the markets were expecting a victory for Hillary. The pair jumped to 1.12 following the news but was pushed back following some serious dollar strength and this was followed in December by the Fed decision to hike rates and guidance for further rates hikes in 2017. This crashed the pair and it broke through some strong supports between the 1.0500 and 1.0600 and looks set to suffer against the onslaught from the US dollar.

From a fundamental perspective, it looks like a difficult period for the EURUSD pair in the year 2017 as the pair now trades at the lowest ranges since 2002. There is nothing to prevent it from falling down to parity and in fact, this is what most banks and funds expect it to do. With the ECB bent on continuing its QE program and with Draghi not even hinting about any concern over the rate of the Euro, there is little fundamental support for the euro. On the other hand, the Fed has been hawkish of late and they can afford to be so as all the latest round of data from the US over the past few months have been pointing to a strengthening economy. With rates hikes being determined by the data, the dollar is in a very good position as the Fed is likely to raise interest rates atleast twice in 2017 and probably even three times if the data supports such a move. The Fed is in a very comfortable place and with Trump indicating that he would like to increase spending, the Fed would like to align with his campaign goals and encourage the same as well. The yields in the US also continue to move higher and this will only attract more and more investments into the US and the dollar which will only help to further strengthen the dollar putting a lot of pressure on the EURUSD pair.

Technically also, as mentioned earlier, one look at the longer term chart would show that there is nothing between the price now and parity and there is not specific support for the Euro technically. The pair is really at a hard place. We could probably get some periods when the pair bounces but those are most likely to be dead cat bounces rather than anything significant. The big sellers are going to sell all the bounces as the fundamentals and the technicals point lower.

In 2017, it will be interesting to see how many rate hikes the Fed does and what effect that each will have on the pair. We believe that the market will soon start pricing in further rate hikes from the Fed and this will only put more pressure on the pair. From our side, we expect the pair to move towards parity during the early part of the year as the markets price in the rate hikes and then the further moves would be dependent on the actual rate hikes and their timing. It would be difficult for the pair to resist the strength of the dollar and with improving data from the US and an increasing confident and hawkish Fed supporting the Trump, it could be a difficult time for other currencies. The only thing that could throw water on the fire would be if and when the new President Trump follows through with some of his atrocious campaign promises and disrupts some of the trade deals with China or their neighbours which would then tip the balance and could make the dollar lose flavor. Till then, it will be all about the dollar in 2017.