Offsetting ECB and FOMC easing is likely to make for uninspiring EURUSD price action in Q4, although the more limited room for rate cuts by the ECB provides a minor source of strength for the euro.
In our view, mean reversion to around the 1.12 area is the most likely outcome for the pair by the end of Q4.
In 2020, improving global growth prospects due to an eventual improvement in US-China trade will prove positive for the euro.
In recent history, EURUSD weakness to levels around 1.05 has been short-lived, and has required simultaneous tightening in monetary policy in the US, loosening in the EU, and additional EU political or macro concerns.
These criteria are unlikely to be met in the near future, so a slight bump higher seems like the likeliest outcome for EURUSD in Q4. Constraints on the ECB’s ability to ease further are also likely to help the euro marginally.
Christine Lagarde will face both internal and external opposition to any further expansions in asset purchases, constraining the ECB’s ability to weaken the euro further. QE at its current pace could continue for 12-24 months before running out of securities to buy.
At this point, a change to the ECB’s capital key or borrower limit would be required.
Judging by vociferous opposition from certain Eurozone central bank heads as well as parts of the German business community, this would require a further deterioration in the Eurozone economy. This suggests that the first months of Lagarde’s ECB presidency will not see an expansion of QE unless macro circumstances in the Eurozone deteriorate to an extent that is not currently apparent in the data.
Fiscal policy loosening is likely to improve the demand picture in the Eurozone in 2020, although the depth and effectiveness of the measures will depend on the extent to which the idea takes hold in northern Eurozone economies, especially Germany.
For example, the Dutch Government’s recent budget announcements amount to a fiscal loosening of about 1% of GDP in 2020, while in France Macron’s concession to the Gilets Jaunes protestors also represents a modest loosening.