EUR unlikely to repeat its strong performance in 3Q 2017, says DBS Bank

EUR/USD appreciated by 7.2 percent from 1.0652 to 1.1426 in Q2 2017, its best quarterly performance since 3Q10; the currency is unexpected to repeat this performance in Q3 this year. According to IMM data, the EUR’s rise in Q2 was attributed to speculators aggressively dumping their bearish EUR bets.

Eurozone break-up fears evaporated after national elections in major European countries rejected far-right populism, especially after the first round of the French presidential elections on April 23. The USD has lost favor with investors after US President Donald Trump’s stimulus plans went off track from March.

Neither did it help that US real GDP growth slipped below its post-crisis average to 1.2 percent q/q saar in Q1. Politically and economically, Eurozone looked more attractive than America. Even so, speculators needed a compelling reason to build long EUR positions to extend the currency’s appreciation. Attention quickly shifted to the European Central Bank’s (ECB) exit strategy on its quantitative easing (QE) program.

ECB President Mario Draghi’s optimistic comments on June 27 provided an excuse for markets to lift EUR/USD to 1.1445 by end-June, its highest level since May 2016. Apart from confidence that growth was above-trend and broadening geographically, Draghi surprised everyone with his view that deflationary forces have been replaced by reflationary ones. Money markets subsequently priced in a 90 percent chance of a ECB rate hike by July 2018.

Since its launch in 1999, the EUR was either flat or weaker in the immediate quarter after appreciating more than 6 percent in the previous three months. If history repeats itself, EUR/USD would end Q3 lower around 1.09-1.14, still well entrenched within its post-QE range between 1.04 and 1.16.

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