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- NAB see EUR/USD rising into new higher range

- ING see more declines

- But both see EUR/USD towards 1.20 by year-end

Outlook for the Euro and Dollar: Analysts suggest the single-currency will end the year higher than it starts, it's what happens inbetween that is up for debate. Foreign exchange strategists with global investment bank NAB are saying the Euro-Dollar exchange rate should shift up a gear sooner rather than later and establish a new range above the existing range that has been in place since mid-October 2018.

According to strategists at the investment banking arm of Sydney-based National Australia Bank (NAB), a prospective rise in the Euro against the Dollar will however require moves towards a more positive Brexit outcome and some stability emerging on the Eurozone economic data front.

"In this environment we still see EUR moving from its current 1.13-1.15 range towards 1.15-1.18 in H1 2019," says a note from NAB released at the start of February.

"It is also becoming clearer that US growth is normalising faster from the ‘fiscal sugar rush’, the Fed now flagging an extended pause. The recent US shutdown also serves as a reminder of the ability of the Democratic Congress to block Trump’s agenda and has increased the potential for policy gridlock," say NAB.

Strategists say a USD reversal is expected to emerge further into 2019 – all the more so if supported by better EZ data; "we see EUR rising to 1.18-1.23 in H2 2019."

The Other Side of the Coin: EUR/USD Going Lower, then Higher

Domestic headwinds are likely to weigh on the Euro at the start of 2019 and see it fall to 1.12 versus the U.S. Dollar initially, but then recover to 1.20 by year-end as the Dollar peaks and rolls over, according to ING Bank.

The initial bout of Euro-weakness will probably be caused by a slowdown in the Eurozone economy and the dawning realisation that the European Central Bank (ECB) will have to stimulate the banking sector again using TLTRO’s - cheap loans provided to Eurozone banks to help encourage them to lend to the real economy, and as a liquidity crutch.

The chances of the ECB raising the deposit rate in Q3-4, as previously expected, has also lessened, which will be a further blow to the Euro.

One major reason currencies rise and fall is relative interest rates, which favour currencies with relatively higher interest rates because they attract and keep greater net inflows of foreign capital drawn by the promise of higher returns.

“With the rising likelihood of new TLTROs being delivered by the end of 2Q19 and the falling probability of an ECB deposit rate hike in 4Q19 (given slower than expected growth and CPI remaining below target), this suggests the euro is unlikely to strengthen for good domestic reasons,” says Petr Krpata, chief EMEA FX and FI strategist for ING.

At the same time as the Euro is falling on domestic slowdown fears and changes in ECB policy, the Dollar is expected to gain a lift from the U.S. Federal Reserve (Fed) raising interest rates.

Despite the Fed’s recent policy shift to a more ‘patient’ stance, ING still expects two more 0.25% interest rate hikes from the Fed in 2019. This will boost the Dollar at the beginning of the year most probably and lead to EUR/USD declining to circa 1.12.

“Given our view, the Fed is not done yet with the tightening cycle (our economists look for two more Fed funds rate hikes this year, after the initial pause in coming months) this suggests a modest downside to EUR/USD in the coming months. We target EUR/USD 1.12 in three-months before a recovery to EUR/USD 1.20 by year-end,” says Krpata.

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Peak Dollar

“We expect EUR/USD to rise persistently but only in response to structural USD weakness,” says Krpata.

One of the reasons why ING is bearish the Dollar in H2 is that it is “significantly overvalued”.

“The big question for 2019 is when will global asset markets be released from the stranglehold of high US interest rates and the strong dollar?” Asks Chris Turner, global head of strategy and head of EMEA and LATAM research for ING. “We think it’s too early to be positioning for a turnaround just yet, however, the dollar is significantly overvalued against most currencies, suggesting any new highs are likely to be marginal.”

Another reason is that U.S. growth - which outperformed the rest of the world (RoW) in 2018 and propelled the Dollar ahead of the pack - will start to converge with the RoW in 2019, resulting in Dollar downside.

A further factor could be political interference in monetary policy which is already an issue, given the number of times Trump has complained about what he sees as the Fed Chairman J Powell’s overly loose approach.

In 2019 the White House could well adopt a more overt easing bias and de facto weak-Dollar policy to help support U.S. exports and as an ‘alternative source of stimulus’, says ING.

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