Despite market optimism that change could be afoot, it is uncertain if German politicians will satisfy the market’s desire for increase fiscal spending on areas such as energy, defence and Ukraine, Rabobank’s Senior FX Strategist Jane Foley notes.

EUR to move towards 1.05 on a 3-month view

“The timing of this uncertainty is very much in focus in view of the US President-elect’s position on Nato and Ukraine. Despite the US’s large budget deficit, the topic of fiscal prudence was not on the agenda during the US presidential election campaign.”

“Trump stance on fiscal policy and tariffs is suggestive of higher inflationary pressures in the US which, in Rabo’s view, is likely to cut short the Fed’s easing cycle. If German politicians continue to struggle to boost growth in Europe’s largest economy, the market is more likely to assume that the baton will be passed to the ECB.”

“The ECB has indicated that it is more confident that inflation is falling sustainably back towards the 2% target and is already widely expected to cut rates next month, for the third consecutive meeting.  Interest rate differentials suggest further downside pressure for EUR/USD. We see the currency pair moving to 1.05 on a 3-month view.”