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The Italian referendum on constitutional reforms is expected to have a pressurizing impact on the outlook of EUR/USD, despite an intact uptrend being observed in the greenback. The anticipated US policy mix under President-elect Trump has proved very positive for the dollar even if details on the future fiscal stimulus are scant.
DXY is now at its strongest level since Q1 2003 and market expectations are growing that the dollar may rise materially further over the medium term as fiscal expansion is overlaid on an economy operating at or very close to full employment. The sharp rise in bond yields has also assisted dollar strength.
Currently, US inflation is rising and the US President-elect’s indicated policy priorities of renegotiating trade arrangements, threatening higher tariffs, and cutting taxes is having exactly the opposite effect on the USD. At present, various PPP estimates, ranging from producer prices to the Big Mac index, imply the euro is around 20 percent undervalued versus USD, ANZ reported.
For now though, the expectation that an expansionary fiscal policy will come when the economy is operating at full employment should continue to lend support to the USD. There is also the potential for a rise in uncertainty should the referendum in Italy fail on 4 December, not to mention elections in the Netherlands, France, and Germany next year.
"As opinion polls have shown this year, forecasting political outturns is very difficult. With that in mind and given the direction of travel in policy divergence, we continue to maintain a bullish disposition towards the USD vs EUR," ANZ commented in the report.
The Federal Open Market Committee (FOMC) is expected to announce a 25 basis points rate rise in the fed funds target on December 14, whilst the ECB is expected to extend its QE program when it meets on December 8.
Meanwhile, EUR/USD is trading 0.11 percent down at 1.06, while at 7:00GMT, the FxWirePro's Hourly EUR Strength Index remained neutral at -38.56 (higher than the -75 benchmark for bearish trend). For more details, visit http://www.fxwirepro.com/currencyindex
